The rising expectations about recovery and inflation are inflicting a lot of pain for higher quality and longer duration segments of the market at the moment. As we have covered previously, the duration of the wider credit market has been increasing for a long period of time, resulting in higher sensitivity to government bond market moves amid withering carry cushion offered by the coupons1. With the lift off in rates2 we are becoming more accustomed to higher interest rate volatility, with 10bps-per-day moves in US 10-year becoming more common these day. Permanently elevated levels of interest volatility bring additional uncertainty for investors as total returns become dominated by spread and interest moves, rather than the more reliable carry component.
If we look at investment grade, we can observe that certain parts of the market are not far away from negative returns on a 1-year horizon. For example, 10+ year global investment grade is now less than 1% with most other parts already erasing 6-9 months of total return just year-to-date (see the chart below). If we take this to the extreme and take 15+ year US investment grade – this segment is down year-on-year. Does it mean you should be buying the dip? To answer this question you need only check what spreads have done in the last 12 months, and they are around 40bps tighter for those markets.
Source: Federated Hermes, ICE Bond Indices. Past performance is not a guide to future performance.
