U.S. Investment Grade Corporates Are Performing Well, Does A Euro Rate Cut Follow The Recent Dip?

by: S&P Dow Jones Indices

By Kevin Horan

The month of May closed on a high note for bonds as the drop in yields saw the S&P/BGCantor Current 10-Year U.S. Treasury Index closed at a yield of 2.47%. Treasuries as measured by the S&P/BGCantor U.S. Treasury Bond Index returned 0.7% for the month and 2.12% year to date.

As of today, the yield on the 10-year is back up to 2.52% neighborhood after dipping down to 2.4%. Last week's rally in all sovereign bonds is looking a bit reactionary to economic growth concerns both domestic and abroad. Focus remains on the monetary stimulus expected by the European Central Bank this week as global central banking activity has been very accommodative and does not appear to be changing anytime soon.

The U.S. economic calendar for this week started today with ISM Manufacturing at 53.4 vs. the expected 56.2 and ISM Prices Paid at 60 vs. the expected 57. Construction Spending for April also came at a 0.2%, which was expected to be at a 0.6%. Tomorrow's Factory Orders (0.5%, expected) and Wednesday's MBA Mortgage Applications (-1.2%, prior), along with ADP Employment Change (213k, exp.) and Nonfarm Productivity (-3%, exp.), will help fill in the picture. Thursday's Initial Jobless Claims (310k, exp.) leading into Friday's Change in Nonfarm Payrolls (215k, exp.) and the Unemployment Rate for May (6.4%, exp.) will be key determinants to the strength, or weakness, of the labor markets.

Investment grade corporates as measured by the S&P U.S. Issued Investment Grade Corporate Bond Index performed very well as the index returned 1.36% for the month and has returned 5.49% year to date. 2014's return has been the best May year-to-date return since the 7.53% return of 2002.

Both the S&P U.S. Issued High Yield Corporate Bond Index and the S&P/LSTA U.S. Leveraged Loan 100 Index ended the month of May with total returns under 1%. The indices returned 0.99% and 0.76% respectively month to date. Numerous new high-yield issues continued to come to market in names such as Audatex North America, Inc., Baytex Energy, Cedar Fair, Interface Master Holdings, Inc. and Precision Drilling. Year to date, the S&P U.S. Issued High Yield Corporate Bond Index has returned 4.69%, while the loans number is lagging behind, returning 1.91%.

Last week, the S&P U.S. Preferred Stock Index (TR) returned 0.73% for the week adding to the month-to-date return of 1.36% and topping out at a year-to-date return of 10.40% for the month. Comparing this hybrid bond/equity product to the S&P 500, the performance outshines the equity index which returned 2.35% for May and 4.97% year to date on a total rate of return basis.

Sources: S&P Dow Jones Indices, data as of May 30, 2014; Leveraged Loan data as of May 31, 2014.

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