The fourth quarter of 2019 was the mirror image of the final months of 2018. The decade ended on a high note – or a low note, if you are focused on the level of credit spreads. At the end of 2018, fears of a slowing global economy drove credit spreads wider and interest rates lower. The U.S. Federal Reserve also raised interest rates at its final meeting of 2018, extending a tightening cycle it started three years earlier. Those trends began to reverse in 2019: The Fed adopted a more accommodative stance, the moderation in economic growth was not as drastic as feared and trade tensions eased toward the end of the year.

U.S. long investment-grade bonds Higher rates, tighter spreads in Q4

Option-adjusted spread and yield to worst calculated for the Bloomberg Barclays Long U.S. Corporate Index as of December 31, 2019.
Sources: Barclays, Bloomberg Index Services Ltd., Refinitiv Datastream. As of December 31, 2019.

In terms of strategy, the long duration portfolio is underweight credit exposure on several measures. Valuations are very high, as reflected in historically tight credit spreads at a time when the U.S. is more than a decade into an economic expansion. However, we have found investment opportunities among companies that are trading at wider spreads than their less highly leveraged peers because they have temporarily increased leverage for acquisitions or other long-term strategic purposes. Several consumer noncyclical companies fit into this category.

The Capital Group Long Duration Credit Composite had a positive return but slightly trailed the benchmark Bloomberg Barclays U.S. Long Credit Index. Issuer selection and curve exposure made the largest positive contributions to relative results, while exposure to U.S. Treasuries was the largest detractor due to the significant tightening of spreads in the fourth quarter.