Credit

Corporates See Yields Drop, Outperform Treasurys

But the market continues to give more speculative issues the cold shoulder.
Ed ZwirnJune 4, 2001

Most corporate bond yields declined last week while outperforming Treasurys.

According to bond index figures supplied by Merrill Lynch to CFO.com (see chart below), typical, option adjusted yields for bonds with a double-B Standard & Poor’s rating or better were lower across the board.

The reduction was greatest for bonds just below investment grade, where the typical yield stood at 8.759 percent as of the close of business May 31, about 22 basis points lower than the prior week.

For triple-A paper, yields declined by about 12 basis points on the week; double-A yields were down 10 basis points; single A, nine basis points; and triple-B, 11 basis points.

In addition, most of the bonds in these ratings notches tightened against Treasurys during the period, with the spread on double-B-rated bonds, which performed the best by this measure, lower by 15 basis points.

More speculative paper, on the other hand, fared more poorly last week.

The yield on B-rated paper stood at 12.912 percent, versus 12.773 percent the prior week, while C-rated bonds were fetching 23.812 percent, some 62 basis points above the prior week.

The same trends apply over the longer haul.

Compared to one year ago, yields and spreads on double-B bonds and better are both significantly lower, while the lesser quality bonds are paying out more and lagging farther behind Treasurys.

This is most pronounced at the lowest rung of the credit ladder, where C-rated bonds yielded 21.819 percent one year ago, or 1,529 basis points over Treasurys.

Indicative Corporate Bond Yields/Spreads

(10-year industrial, option adjusted) (COB May-31-2001)

  CURRENT WEEK AGO YEAR AGO
Rating Yield Spread* Yield Spread* Yield Spread*
AAA 5.819% 79 5.937% 81 8.300% 104
AA 6.059% 100 6.163% 100 7.835% 131
A 6.531% 136 6.624% 137 8.126% 160
BBB 7.323% 203 7.430% 206 8.786% 229
BB 8.759% 357 8.979% 372 10.650% 412
B 12.912% 768 12.773% 746 12.246% 572
C 23.812% 1853 23.189% 1782 21.819% 1529

* Basis points over Treasurys

Source: Merrill Lynch & Co.

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