The damaging combination of rising government bond yields and widening credit spreads made for a very tough quarter for fixed income investors – one of the weakest since the Global Financial Crisis.
Despite falling back in late June as investors’ focus shifted from rising inflation and interest rates to the weaker outlook for growth, the yield on 5-year US Treasuries finished the quarter 57bps higher at 3.04%. Meanwhile, high-yield credit spreads widened by 220bps in the US market and 227bps in Europe, bringing valuations to levels only seen in periods of extreme macro and market structure distress.
Investment-grade (IG) bonds sold off with the rest of the credit market but held up better than high-yield debt as investors flocked to safety. So, while Q1 2022 was characterised by higher-quality parts of the market underperforming as investors shunned duration risk, growth-related concerns saw lower-rated credit underperform in Q2; and after showing impressive resilience in Q1, some of the loan market’s year-to-date outperformance began to unwind in Q2 as the risk-off contagion spread.
Spreads are now wider than long-term averages across all large credit markets and valuations are particularly cheap from a yield standpoint, given the move in underlying government bond yields.