U.S. Corporates: Strong for the Duration

Mid Week Bond Update

U.S. Corporates: Strong for the Duration

Historically high duration and spreads near cyclical lows reflect a favorable environment for U.S. Corporates.


U.S. investment-grade corporate bonds performed strongly in 2019, with the U.S. Corporate Bond Index1 rising just over 14.3% - far outpacing the U.S. Aggregate Index, which rose about 8.6% over the same period. 

Two key statistics - duration and spread - offer insight into the current opportunities and risks for the sector. Duration, which reflects sensitivity to movements in underlying interest rates, is near the highest level since Q3 1979 (7.97 as of January 7, 2020) - over forty years ago. In effect, this reading suggests a one-basis-point rise in interest rates would result in a seven-basis-point fall in price. 

Yet at the same time, average U.S. Corporate spreads are about 98 basis points, lows not seen since late 2006, before the 2007-9 financial crisis.

U.S. Corporates: Average Duration vs. Spread

Source: Bloomberg, as of 1/7/2020. US Corporate Avg Spread and Modified Duration are for Bloomberg Barclays US Corporate Bond Index. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


While duration and spread can be read as measures of risk, they also reflect the larger reality of an economy that continues to grow, as well as institutions still determined to help it along. Indeed, the current figures go far to explain the strength of the bond markets over the past year - as the fear of rising rates was replaced with near-unanimous central bank accommodation, as well as discussions in Europe and elsewhere of adding fiscal stimulus to the mix.
 

On the rise: Europe Corporate Funding

January 7th saw over 20 issuers of euro-denominated bonds raise some €27 billion ($30 billion) of new cash, reflecting average borrowing costs near a record-low 0.4507%, vs. about 1.375% one year ago. The number of issuers was about double the figure on the equivalent year-ago date and made for the busiest day in this corporate funding market in nearly three years.

The issuance was also notable because of the geopolitical context. During a week marked by rapidly increased fears of disruptions due to a spike in Middle East political tension, this corner of the market appeared to be unfazed. In fact, the rapid recovery of most financial and commodity markets from last week's U.S. airstrike included the markets for crude oil, which recovered their levels within a day or two.
 

On the slide: U.S. Trade Balance

November's trade gap with the rest of the world narrowed to $43.1 billion from October's $46.9 billion, slightly below median expectations. Overall exports of goods and services in November rose 0.74% to $208.6 billion, including increases in consumer and capital goods, as well as soybeans. Imports fell 1% to $251.7 billion, with declines in civilian aircraft, consumer goods and petroleum products.

The net trade surplus in petroleum rose slightly, to a record $832 million, underlining the U.S. newly-found position as a net exporter. That net figure reflected imports of petroleum, adjusted for prices, which came to $27.2 billion, the lowest figure since 1994.

Notably, the two largest trading partners with the U.S. are now Mexico and Canada, with China falling to third place as U.S. - China trade was affected by recent trade tensions.

 

Note: The year for all dates is 2020 unless otherwise indicated


1 Bloomberg Barclays U.S. Aggregate and Corporate Bond Indexes,  1/3/2019 - 12/31/2019

 

Definitions:

A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.

The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The US Corporate Index is a component of the US Credit and US Aggregate Indices. 

Duration is a measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. It is calculated as the weighted average of the present values for all cash flows.

Modified duration allows investors to measure the sensitivity of a bond to changes in interest rates. 

A spread is the difference in yield between two different types of fixed income securities with similar maturities. 

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