High-Yield Credit Is Still a Buy
(2 min read)
Amid the volatility and uncertainty sparked by a jump in the 10-year Treasury yield, equities and corporate credit markets hit turbulence in recent weeks (Chart 1). The surprise was that the high-yield market was so muted. Both investment-grade and high-yield spreads traded in a 15bp range – something quite unusual when volatility hits. The difference is that investment-grade spreads are near the wides of 2021, and high yield has recovered to the year’s tights. We see this robust performance indicating strong underlying fundamentals.
Still, we favour high-yield over investment-grade credit at this juncture. As long as markets are concerned about higher inflation and further increases in Treasury yields, investment grade will struggle to recover. The investment-grade sector has duration risk similar to the 10-year Treasury note; if Treasury rates rise further, investment-grade total returns will be hit even if credit spreads are little changed.
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