Weekly Market Summary

Extra Credit^*

• Since September 2022, the investment-grade corporate bond index yield has remained almost entirely above 5%. Despite investment-grade corporate bonds being a spread product, much of the buyer base focuses on all-in yields as buy-to-hold investors and consistently high yields have driven flows into investment-grade corporate bonds. Outside of a few brief buyers' strikes when yields spiked, any rate sell-off has been met with strong investor demand, as investors have been comfortable with investment-grade companies' ability to withstand higher financing costs since the opportunity to lock in yields in such high-quality credits has been attractive for those accustomed to the near-ZIRP (zero interest rate policy) policies of the 2010s.
• Treasury yields are currently more volatile than investment-grade corporate yields. The six-month rolling volatility of the U.S. Treasury portion of investment-grade yields is higher than the same metric for the investment-grade corporate bond index yield. In fact, this inversion in volatility has persisted for the past 60 trading days. So even despite the diminished incentive to buy investment-grade credit from a spread perspective, investors have received the benefit of lower volatility relative to U.S. Treasuries when taking credit risk.
• The negative correlation between spreads and rates is contributing to the lower yield volatility in investment-grade credit. The correlation between 10-year Treasury yields and investment-grade corporate bond spreads is typically negative, as higher yields typically offer a more attractive entry point. Throughout much of the second half of 2024, this relationship was the most negative it has been in the post-pandemic era, highlighting just how sensitive the bid for credit has become to incremental moves higher in yields.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the January at 1.50% for high-yield bonds and 0.30% for bank loans, down from 1.52% and 0.36% December. This is also well below the long-term historical default rate of 3% for loans and 3.4% for high yield, and the historical post-GFC default rates of 2.3% and 2.5%, respectively.

Sources: Bloomberg and JP Morgan as of 2/17/25.