Midyear Outlook: Bond Investing in the Era of Low and No Yield
Low yields plus rising defaults seemingly leave little ground for bond investors seeking safety or income—or both. But for investors who remain flexible, these objectives aren’t as distant as many think.
Markets Didn’t Stay Down for Long
March 2020 was among the most challenging periods in the history of the bond markets, as fallout from the coronavirus pandemic derailed a global economy already experiencing tepid growth.
Credit spreads blew out to their widest levels in a decade, and at unprecedented speed. Liquidity evaporated. Oil prices plunged. And bond investors found they had nowhere to hide outside of government debt—and US Treasuries in particular.
In early April, we forecast that the credit markets were more likely to snap back than to gradually return to normal. The second-quarter rebound was even faster than we expected, thanks largely to a swift and massive global fiscal and monetary policy response that included easing of key rates and highly supportive bond purchases.
As hoped, this policy response restored stability and liquidity to the global bond markets and led to a reversal in spreads on risk assets in the second quarter. US high-yield spreads versus Treasuries, for example, narrowed roughly 500 basis points from their peaks—though they remain above January levels. A surge in new corporate issuance found so many enthusiastic buyers that offerings were frequently oversubscribed.
But the recovery hasn’t been uniform. Investment-grade corporate bonds saw the fastest rebound, with spreads now close to their 10-year averages. High-yield corporates, emerging-market debt (EMD) and US credit-risk–transfer (CRT) securities aren’t far behind. And US commercial mortgage-backed securities (CMBS), with their heavy exposure to retail, have begun to rebound too.