Track fixed-income opportunities with this monthly update.
One way to understand where opportunity lies in the broad fixed-income market is to look at credit spreads, which measure the difference in yield between a bond and a risk-free benchmark bond (e.g., U.S. Treasuries) with the same duration.
When looking at opportunities across fixed income, credit spreads indicate how much more an investor is being compensated for taking on the additional risk.
If spreads are above their long-term average, they are referred to as wide; if they’re below their long-term average, they are referred to as tight.
Spreads are continually changing, and those changes are driven by investor sentiment and perceptions of risk.
Our proprietary Fixed-Income Monitor compares current spreads relative to 20 years of history, across fixed-income asset classes, to help investors identify opportunities across fixed-income sectors.
Key takeaways for February 2024
- Positive momentum coming into the new year slowed in January as investors digested firmer than expected economic data.
- Volatility was subdued relative to prior periods. After initially selling off, spreads ended the month essentially flat across credit and securitized assets. Interest rates edged higher during most trading days but ended near their starting levels.
- While current spreads remain tight across many sectors, yields are at multi-year highs, which has reignited demand for high-quality, lower risk income across the fixed-income landscape as the Fed moves towards easing monetary policy.
Learn more about the importance of understanding spreads from Gene Tannuzzo, Global Head of Fixed Income.
Transcript
In the bond market, when we talk about spread product, we’re talking about any bonds that are not the risk-free asset. So in the taxable bond market, we’re talking about any bonds that are not Treasuries or trade at an additional yield relative to Treasuries.
In the municipal bond market, we’re talking about any bonds that are not AAA, general obligation bonds. The primary role of spread products is adding additional yield to a portfolio.
When we look at spreads over a long period of time, if they’re above their long-term average, we might refer to them as wide or cheap. And if they’re more expensive than their long-term average, we might refer to them as rich or tight.
So in general, we’re looking for spread product or opportunities in the bond market where credit spreads are wide or cheap relative to the risks inherent in that security.
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