The Yield-Grab Faucet Remains Open, as Long as Rates Are Range Bound

Crude oil has been able to recover from its recent free fall and has stabilized at USD 57 over the week.  The stability in oil, with the expectation of prices going higher, has investors changing their view from deflation to an increasing inflationary expectation.  The performance of the S&P U.S. TIPS Index does not reflect the current inflation conversation.  Part of the reason for this is the additional supply of USD 18 billion in five-year TIPS that were auctioned on April 23, 2015.  In preparation for the auction, traders sold positions, driving the index down over the course of April 20-22, 2015.  The auction was considered a success, with heavy demand, setting a coupon that is the lowest coupon rate since 2013.  Following the auction, the index rose 0.69%, but this was not enough to offset the -1% of pre-auction selling.  The index has returned 1.24% MTD and 2.51% YTD, as of April 24, 2015.

As rates have remained relatively range bound since the middle of March 2015, the performance difference between investment-grade and high-yield bonds has investors interested on both sides of the fence.  The view on a Fed rate increase has drifted from a September time frame, and some market participants are now mentioning December.  The hunt for yield is still on, as long as rates remain relatively stable or range bound.

  • The MTD performance of the S&P U.S. High Yield Corporate Bond Index (1.71%) is outperforming the more credit-worthy S&P U.S. Investment Grade Corporate Bond Index (0.34%), as of April 24, 2015.  As of the same day, the YTD performance story is the same, as investment-grade bonds have returned 2.47%, while high-yield bonds have return 4.40%.
  • The S&P Crossover Rated Corporate Bond Index captures a range of both investment-grade and high-yield bonds, as its constituents range between ratings of BBB+ down to BB-.  The index has returned 0.71% MTD and 3.11% YTD (as of April 24, 2015).
  • The S&P/LSTA U.S. Leveraged Loan 100 Index, which holds secured bank loans from speculatively rated issuers, has returned 0.75% MTD, much like the crossover index, but its YTD performance lags behind, at 2.61% as of April 26, 2015.

Source: S&P Dow Jones Indices, data as of 4/24/2015, senior loan data as of 4/26/2015.

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