Investors Push Yields on Corporate Bonds Lower

Oct.11.10 | About: iShares Core (AGG)

By Maulik Mody

Amidst a sluggish recovery where investors have pushed Treasury yields to an all-time low and speculate on the Fed’s next move, corporate bonds continue to rally as seen by the iTB High Grade bond indices. The demand for company debt as wary investors seek yields higher than those offered by Treasuries has pushed corporate bonds to the highest levels since the recession.

The short iTB Index which tracks the performance of bond maturing within 5 years from now rallied 0.6% in the week ended Oct 8. The index now reads 1095.02, as the average yield pushed 19 bp lower to 2.13%. Even as investors bid up prices of shorter termed Treasuries as they anticipated that the Fed will add shorter termed bonds to its balance sheet, corporate bonds outperformed the risk-free assets. Average spread tightened 8 bp to 1.56%.

The leading bond in this index was Genworth Financial’s 5.75% issue due 2014. The bond gained $1.94 in price and now trades at 105.88 as its yield pushed 57 bp lower to 4.01. This BBB rated bond offers among the highest yields in the index, second only to Zion Bancorp’s issue. The spread on the bond tightened 43 b to 3.31%. The company’s stock also rallied on Friday and was the top performer among leading insurance companies as it gained 4.5% in the week ended Oct 8.

The longer iTB index, which tracks bonds having maturity greater than 5 years, continued to rise as investors preferred to buy in the longer end of the spectrum. The index advanced 1.5% to 1172.73 during the week ended Oct 8, as average yield fell 21 bp to 3.65%. Spread to Treasuries tightened by 6 basis points to 1.58%. Bonds in the longer end of the spectrum continued to outperform Treasuries.

Breaking the streak of the oil company bonds (Transocean, BP and Anadarko Petro), was Citigroup’s 8.5% issue due 2019. The bond rallied 2.87 during the week and traded last at 126.58. The yield dropped 26 bp to 4.71%, as its spread tightened 20 bp to 2.69%. ArcelorMittal’s 9.85% issue was also among the top performers, as its bond gained 2.75 in price pushing its yield 34 bp lower to 5.16%. Spread tightened 18 bp to 3.16%.

Disclosure: None