After tightening through much of the year, spreads over Treasurys for U.S. investment-grade and high-yield corporate bonds have reversed course, widening to about where they stood in January. For the first time in 2011, investment-grade and high-yield markets delivered negative excess returns compared with Treasurys.
Losses in municipal bonds, government debt and investment-grade corporate bonds are taking their toll on fixed-income investors and making high-yield bonds appear to be a safe haven. High-yield, high-risk bonds gained 0.8% this month, while Treasurys lost 1.9%, investment-grade corporate debt lost 1.5% and municipal debt was down 1.4%, according to index data from Bank of America Merrill Lynch.
Credit investors are focusing more on borrowers more likely to survive a difficult economic period, causing returns on investment-grade corporate bonds to outperform those of high-yield bonds. High-grade bonds have risen 1.36% this month, while speculative-grade debt has inched up 0.08%, according to index data from Bank of America Merrill Lynch.
Buyers of European high-yield bonds are signaling their confidence that Greece will make it through its sovereign-debt problem. This year, Europe's high-yield bonds have brought a 2.26% return, according to Bank of America Merrill Lynch. Meanwhile, U.S. high-yield corporate debt has given investors a 0.36% loss. "Greece is seen as more of a concern for the banks and investment-grade than for high yield," said Martin Fridson, CEO of Fridson Investment Advisors.
There have been just 83 high-yield bond deals this year, and investment-grade bond deals are off 25%. Deals that are getting done are featuring problematic returns. Amid stock market turmoil, some experts say the relative silence in the debt market may be the most telling sign of the troubled economy.