KHYB - Columbia Threadneedle Fixed Income Monitor: October 2023
2023-10-18 01:35:00 ET
Summary
- Treasury yields across the curve rose to 20-year highs as the market assessed the possibility of the Fed leaving policy rates higher for longer.
- Credit posted mixed results, with higher risk sectors softening late in the period together with equities.
- While spreads are less attractive across credit sectors, historically high yields offer significant volatility buffering should the economy sour.
One way to understand where opportunity lies in the broad fixed-income market is to look at credit spreads, which measure the difference in yield between a bond and a risk-free benchmark bond (e.g., U.S. Treasuries) with the same duration.
When looking at opportunities across fixed income, credit spreads (between a bond and the risk-free benchmark) indicate how much more an investor is being compensated for taking on the additional risk.
If spreads are above their long-term average, they are referred to as wide; if they're below their long-term average, they are referred to as tight. Spreads are continually changing, and those changes are driven by investor sentiment and perceptions of risk.
Our proprietary Fixed-Income Monitor compares current spreads relative to 20 years of history, across fixed-income asset classes, to help investors identify opportunities across fixed-income sectors.
Key takeaways for October 2023
- Treasury yields across the curve rose to 20-year highs as the market assessed the possibility of the Fed leaving policy rates higher for longer.
- Credit posted mixed results, with higher risk sectors softening late in the period together with equities.
- While spreads are less attractive across credit sectors, historically high yields offer significant volatility buffering should the economy sour.
Learn more about the importance of understanding spreads from Gene Tannuzzo, Global Head of Fixed Income.
Transcript
In the bond market, when we talk about spread product, we're talking about any bonds that are not the risk-free asset. So in the taxable bond market, we're talking about any bonds that are not Treasuries or trade at an additional yield relative to Treasuries.
In the municipal bond market, we're talking about any bonds that are not AAA, general obligation bonds. The primary role of spread products is adding additional yield to a portfolio.
When we look at spreads over a long period of time, if they're above their long-term average, we might refer to them as wide or cheap. And if they're more expensive than their long-term average, we might refer to them as rich or tight.
So in general, we're looking for spread product or opportunities in the bond market where credit spreads are wide or cheap relative to the risks inherent in that security.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Columbia Threadneedle Fixed Income Monitor: October 2023