Chart: A robust sledge for investment-grade credits
Inflation has remained stubbornly high, with the latest CPI reading showing a 7% annual increase in December. In response, the Federal Reserve has become more hawkish on short-term rates and its long-term bond buying program. In 2021, the Bloomberg US Corporate Bond Index lost more than 1%, and the prospect of higher interest rates could lead to another tough year.
Yields up: Treasury yields have risen in response to inflation and the Fed will likely raise rates, with the 10-year yield at 1.83%*, up 32 basis points since the end of 2021. last year, the yield rose 58 basis points. While inflation was 5.4% in 1990, the 10-year rate ended the year at 7.94%.
Treasury yield curve
Businesses too: As Treasury yields rose, higher quality yields followed suit. The yield at worst of the Bloomberg US Corporate Bond index is 2.69%* against 2.33% at the end of the year. This level is historically low with a YTW close to 10% at the end of 1990, and around 3% to 4% over the last decade.
Premium performance at worst
Ratings remain stable: On the positive side, there was no deterioration in credit quality. Last year, Fitch Ratings Inc. upgraded 43 investment grade corporate credits while downgrading eight. In 2020, influenced by the pandemic, there were 13 upgrades and 32 downgrades.
Upgrades and downgrades of North American bonds by quarter
*As of January 20. **Spread adjusted for Bloomberg US Corporate Bond Index options. Sources: US Department of Treasury; Bloomberg LP; Fitch Ratings Inc.