Credit

Investment Grade Bonds Gain, But Underperform Treasurys

Yields on higher quality bonds continued to drop this week, but most corporates failed to keep up with a rally in government paper.
Ed ZwirnJune 22, 2001

Investment-grade bonds scored gains across the board this week, but failed to keep up with Treasurys.

The result was lower indicative yields for most bonds rated triple-B or better by Standard & Poor’s, while spreads to Treasurys were wider throughout all rungs of the credit ladder.

According to bond index figures supplied by Merrill Lynch to CFO.com (see chart below), typical option adjusted yields for innvestment-grade bonds were lower by some one or two basis points.

The reduction was greatest for double-A-rated bonds, with the typical yield for bonds of that quality at 5.826 percent as of the close of business June 21, nearly three basis points lower than the prior week.

For triple-A paper, yields declined by about one basis point on the week; single-A and triple-B yields were also down one basis point.

On the other hand, corporate bonds of all ratings levels underperformed in relation to comparable Treasurys. This trend was most pronounced with junk bonds, where C-rated paper saw its spread to Treasurys widen by 60 basis points.

After doing somewhat better the week before, the poorest quality continued to see lower demand from investors, with the yield on C-rated bonds at 24.411 percent, versus the prior week’s 23.854 percent; B- rated bonds yielded 13.7 percent, versus 13.367 percent; and double-B, 8.895 percent, versus 8.761 percent.

But most bonds continue to give lower yields than they did one year ago.

Yelds and spreads on double-B bonds and better are significantly lower than they were on June 21, 2000, while 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 21.528 percent one year ago, or 1,519 basis points over Treasurys.

Indicative Corporate Bond Yields/Spreads

(10-year industrial, option adjusted) (Wk ending June 21-2001)

CURRENT WEEK AGO YEAR AGO
Rating** Yield Spread* Yield Spread* Yield Spread*
AAA 5.607% 79 5.618% 74 7.388% 103
AA 5.826 99 5.854 95 7.598 124
A 6.320 133 6.330 137 7.887 153
BBB 7.112 204 7.117 199 8.481 214
BB 8.895 395 8.761 376 10.352 400
B 13.700 872 13.367 833 11.996 566
C 24.411 1937 23.854 1877 21.528 1519

Click here for last week’s article, chart.

* Basis points over Treasurys ** Standard & Poor’s

Source: Merrill Lynch & Co.

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