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Categories
Fixed Income
Long duration credit update for the fourth quarter of 2021
Greg Garrett
Investment Director

Investors continued to confront the complications associated with a global pandemic during the fourth quarter. The latest coronavirus variant of concern, omicron, was only discovered in November but spread to many countries in a matter of weeks. Inflation continued to assert itself and job growth improved. The U.S. Federal Reserve announced at its December meeting that it will end asset purchases in March, and Fed officials now forecast at least three quarter-point hikes in the federal funds rate in 2022. The U.S. Treasury yield curve flattened during the quarter and corporate credit spreads widened on an option-adjusted basis.


U.S. long investment-grade bonds

Spreads widened, yields mostly fell in the fourth quarter

Chart shows the option-adjusted spread and yield to worst for U.S. long investment-grade bonds, along with 10-year and 30-year U.S. Treasury yields. Data shown are from January 1, 2021, through December 31, 2021. The chart shows that the option-adjusted spread widened 8 basis points to 130 basis points in the fourth quarter but narrowed 10 basis points for the year. Yield to worst fell 7 basis points to 2.71% during the fourth quarter and rose 34 basis points for the year. The 10-year U.S. Treasury yield was unchanged at 1.52% for the quarter but rose 59 basis points for the year. The 30-year U.S. Treasury yield fell 18 basis points to 1.90% in the fourth quarter but rose 25 basis points for the year.

Option-adjusted spread and yield to worst calculated for the Bloomberg Long U.S. Corporate Index as of December 31, 2021.

Sources: Bloomberg Index Services Ltd., Refinitiv Datastream. As of December 31, 2021.

Against this backdrop, the Capital Group Long Duration Credit Composite outpaced the benchmark Bloomberg U.S. Long Credit Index on a gross of fees basis during the quarter but lagged net of highest management fees. 


The Fed’s more aggressive approach to tackling inflation will likely drive tighter monetary conditions in 2022. Frictions remain in the economy, which could produce slower-than-expected growth even as inflation persists. In addition, countries outside the U.S. are also struggling with the pandemic and its effects on their economies. This is a challenging background. When combined with tight valuation levels and compression in spread between higher quality and lower quality credits, we have maintained a defensive posture.



Greg Garrett is an investment director with 34 years of industry experience (as of 12/31/21). He holds a bachelor’s degree in finance from the University of Arizona.


Learn more about

The Bloomberg U.S. Long Credit Index is a market-value-weighted index that tracks the total return results of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements, with maturities of 10 years or more. To qualify, bonds must be SEC-registered and must be an investment-grade security. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, account fees, expenses or U.S. federal income taxes.

 

The return of principal for bond portfolios and for portfolios with significant underlying bond holdings is not guaranteed. Investments are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.

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