According to Bloomberg Barclays indexes, corporate junk bond OAS widened during the first week of the year by 17bps amid a sudden rise in Treasury yields. At the same time, investment-grade corporate spreads widened only 1.37bps. Yet, junk is down only 1.15% year-to-date, while high-grade corporates dropped by 2% in terms of total return. As volatility in the Treasury market stabilizes, we see corporate spreads recover their losses. Today, junk records a loss of -0.6% since the beginning of the year, while quality is still registering a loss of -1.9%.
The conclusion that bond investors can draw from this is clear. Duration will be 2022 big villain, while credit quality will continue to be overlooked as long as negative real yields provide favorable financing conditions.
This point gets more explicit when we compare total junk return by rating. Better-rated junk (BB) dropped faster than lower-rated junk (CCC) because it contains more duration than the latter. Not only, but the bid for higher-yielding corporates, regardless of credit quality, remains strong. Indeed, there is no other instrument in the bond market that can offer a high enough yield to create a buffer against high inflation and rising interest rates. On top of that, helicopter money in 2020 and 2021 improved credit quality within weaker companies, leading S&P and Moody’s to give much more rating upgrades than downgrades last year than ever in the past ten years.