U.S. corporate bonds have maintained their attractiveness for investors, with a renewed narrowing of the spread between 10-year corporates and the benchmark 10-year Treasury since April.
While the yield on the 10-year Treasury has dropped by 10 basis points since the end of April, investment-grade corporate bond yields have dropped by roughly 25 basis points.
The most recent downshift in spreads is indicative of investors’ estimation of the relative impact of the increase in U.S. government Treasury issuance during the final four months of the year.
The prospect of increased government debt issuance will have a greater negative impact on Treasuries than sluggish economic growth will have on corporate debt.
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With investor risk appetite robust, one must ask the question: Why would the Fed be cutting rates as inflation rises, equity valuations float upward and investment-grade spreads narrow, implying a possible re-acceleration of the economy?
This is just one of the important questions that should permeate the Kansas City Fed’s Jackson Hole symposium this week and, in the run-up to the Fed’s policy decision on Sept. 17, whether to cut rates or remain on hold pending the evolution of employment and inflation data.
