“What happened is that the spread, or gap, between the yields on BBB bonds and 10-year Treasuries got unusually tight a year ago and has now widened, with corporate yields rising and prices, which move in the opposite direction, falling,” reports Kiplinger. “That repricing of debt is the primary reason for 2018’s fizzle.”
LQD holds about 1,950 bonds with an effective duration of 8.28 years. While last year was hard on investment-grade corporate debt, recent equity market volatility may prompt investors to seek refuge under the umbrella of investment-grade corporate bonds again. As a result, high yield has underperformed lately as investors flocked to the safer confines of investment-grade debt issues. Still, risks linger for BBB corporates.
“But bonds rated BBB, the lowest quality considered better than junk, account for half of all investment-grade debt by dollar volume, a proportion that has grown nonstop from 10% in the 1980s,” according to Kiplinger. :The market shares of AA and AAA bonds have shrunk accordingly; single-A bonds have held steady at about 35%.”
For more trends in fixed income, visit the Fixed Income Channel.