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The Historic Rally In Corporate Bonds

Ploutos profile picture


  • The rally in corporate bond spreads over the past 50 trading days echoes the tremendous spread rally seen in the early days of the economic recovery in 2009.
  • Investors in investment grade corporate bonds have done quite well even as government bond investors have fared poorly amidst higher interest rates.
  • With investment grade corporate bond yields approaching historic lows, the risk-return tradeoff in corporate credit has weakened.
  • Very attractive financing rates for investment grade companies supports broader equity markets, reducing the cost of capital for companies and reducing the risk of financial distress.

Most investors are aware of the historic nature of the equity market rally. Since the lows on March 23rd, the S&P 500 (SPY) has rallied nearly 40%. Gains this large over this short of a time period have not been seen since the Great Depression. An amazing rally is also taking place in investment grade corporate bonds, and the scope and scale of that rally may have a positive feedback loop on the economic recovery and broader asset markets.

The graph below shows a 20-year history of investment grade corporate bond spreads. These spreads refer to the average spread premium above similarly matched Treasuries for investment grade rated companies. The spread widening in the first quarter of 2020 eclipsed every other previous stress episode - the TMT blowup in early 2000s, 2001 recession, 9/11, the debt ceiling debacle of 2011 and U.S. downgrade, rolling sovereign debt crises, the 2015-16 commodity crisis, and the late 2018 swoon - trailing only the Global Financial Crisis in 2008-2009.

History of IG spreadsThe next graph shows spread changes over 50 trading day intervals. The spread widening that peaked on March 23rd, 2020, saw spreads widen from 97bp over Treasuries to 373bp over Treasuries over 50 trading sessions. That was the sharpest period of spread widening since the period ending November 21, 2008 when spreads had widened 292bp to 604bp over a similar time horizon. The notable difference, of course, is that spreads were very tight prior to the recent blowup, reflecting the magnitude and exogenous nature of the economic shock.

IG spreads rolling 50 daysSpreads have reversed as quickly as they widened. Over the last 50 trading sessions from the recent wides, spreads are 217bp tighter - from 373 to 156. This is the sharpest spread rally since the periods ending in June 2009. At that time, three months after stocks had bottomed during the Global Financial Crisis, spreads

This article was written by

Ploutos profile picture
Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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