The bond-market rout is dealing a particular blow to investors’ bets on the safest U.S. companies, dragging returns on investment-grade corporate debt to their second-worst start on record.
Bonds from highly rated companies have lost 5.3% this year, counting price changes and interest payments, through March 19. That is their second-worst start in data going back to 1996, the worst being last year’s pandemic-fueled selling, according to Bloomberg Barclays data. That compares with a minus 0.05% return for high-yield bonds and a 1.7% gain in corporate loans to highly indebted borrowers.
Eroding demand are expectations that vaccines and new stimulus money will boost the economy, lifting growth and inflation and reducing the appeal of bonds’ fixed payments. Falling bond prices recently pushed the yield on the benchmark 10-year Treasury note, a key gauge of borrowing costs throughout the economy, above 1.7% for the first time since January 2020.
Investors typically prize bonds from blue-chip companies such as Apple Inc. and Amazon.com Inc. because they offer higher returns than government debt, with relatively little additional risk. While fears of widespread downgrades and defaults sparked steep declines during the pandemic’s market plunges, moves by the Federal Reserve to support the economy and corporate balance sheets fueled a recovery. Companies borrowed more than $1 trillion, and investment-grade bonds returned 7.5% last year.
The extra yield investors demand to hold highly rated corporate bonds instead of Treasurys reached 1 percentage point earlier this month, its highest level since December, up from 0.88 percentage point in mid-February. While the gap has since narrowed slightly—and remains extremely low by historical standards—it has heightened investors’ worries that extended selling in Treasurys could tighten financial conditions and disrupt corporate borrowing.
