February Made Bonds Shiver, While Energy Kept High Yield Warm

Investment-grade corporate yields widened by 15 bps, as the yield-to-worst of the S&P U.S. Issued Investment Grade Corporate Bond Index moved from a level of 2.16% at the beginning of the month to 2.76% at the end of month.  The price return of the index was -1.44% MTD, but 30 bps of coupon return brought the total return down to -1.15%.  February’s negative return was in contrast to the 2.88% gain in January.  The last time this index had a similar negative monthly return was September 2014’s -1.18%.  As of February 28, 2015, the YTD return stands at 1.70%.

High yield, as measured by the S&P U.S. Issued High Yield Corporate Bond Index, showed a contrasting reaction compared with its investment-grade counterpart.  The S&P U.S. Issued High Yield Corporate Bond Index’s yields went from 6.26% at the start of the month to 5.73% at month’s end.  The index returned 2.25% MTD and stands at 3.08% as of February 28, 2015.  February’s return help add to January’s small return of 0.80%.  With oil back up at USD 50 (as quoted by the NYMEX light sweet crude oil futures), the energy sector (15%) of the S&P U.S. Issued High Yield Corporate Bond Index returned 5.73% in February.  The last monthly return of a similar magnitude was October 2013 (2.36%).

The new-issue loan market is quiet, and market participants don’t see this changing in the near term.  The current continuation of lower rates has helped loans claw back some returns.  For the S&P/LSTA U.S. Leveraged Loan 100 Index, the YTD return of 1.67% is the index’s highest level this year.  For February, the index returned 1.45%, following January’s slow start of 0.20%.

The yield of the S&P/BGCantor Current 10 Year U.S. Treasury Index started February at 1.66% and progressively rose to 2.15% by the middle of the month, as expectation on the timing of a rate increase by the Fed was anticipated.  The end of the month saw the index’s yield reverse, moving from a high of 2.15% to a low of 1.97%, before ending the month at 2%.  Concerns from Europe over Greek funding coupled with a statement from Fed Chair Janet Yellen, which included the word “patience” in regard to rates, contributed to the end-of-the-month drop in the index’s rates.  The index returned -2.83% in February and is at 2.28% YTD as of February 28, 2015.

As of March 2, 2015, the U.S. 10-year Treasury bond is yielding 2.06% on the release of a report showing consumer purchases (adjusted for inflation) rose in January, reigniting the expectation that the Fed will take steps toward increasing rates sooner rather than later.  It is reasonable to expect rates to rise in anticipation of an eventual rate increase by the Fed.

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