U.S. Bonds: Focus on changes in the investment environment
2022-10-21
■ Since the beginning of the year, the rise in U.S. Treasury yields has contributed more to the decline in bond indices than the deterioration in credit risk.
■ The investment environment is expected to change in the first half of next year.
The investment environment for U.S. bonds has deteriorated significantly so far this year. A review of U.S. bond indices (Bloomberg Bond Index) shows that since the beginning of the year (as of the 19th), the top decliners have been, in order, the U.S. High Yield (HY) Corporate Bond Index (14.0%), the U.S. Treasury Bond Index (14.6%) and the U.S. Investment Grade (IG) Corporate Bond Index (20.3%). The 10-year U.S. Treasury yield rose 2.62% (from 1.51 to 4.13%) and the 2-year U.S. Treasury yield rose 3.83% (from 0.73 to 4.56%), with the overall U.S. Treasury yield curve rising, with a larger increase in the short-term zone. The Fed's unusually rapid and sharp rate hikes have arguably led to a marked deterioration in the performance of U.S. Treasuries and U.S. IG corporate bonds. Meanwhile, the yield difference (spread) between corporate bonds and government bonds of the same maturity widened as follows: 0.72% for IG corporate bonds (from 0.92 to 1.64%) and 2.22% for HY corporate bonds (from 2.83 to 5.05%). The impact of increased credit risk was judged to be relatively small, although the economic downturn was factored in.
This investment environment for U.S. bonds is expected to change in the first half of next year. Based on the monetary policy presented at the September FOMC meeting, the core view is that interest rates will stop rising in the first half of next year and remain at the same level until mid-2024. The current perception that inflation is slowing more slowly than expected raises concerns about continued large rate hikes and speculation about the upside of the policy rate (terminal rate) in the next phase of rate hikes, but concerns about a downturn in the U.S. economy are expected to intensify over time and yields on 10-year U.S. government bonds are likely to remain low. Upside is likely to be limited. Meanwhile, a survey released by the Federal Reserve Bank in August showed that U.S. financial institutions have tightened lending standards significantly and quickly, while some major U.S. financial institutions increased their reserve funds for the recession in their July-September final Going forward, it is more important to be more vigilant about credit risk than the risk of rising interest rates. Meanwhile, the decision to invest in U.S. Treasuries should be raised to slightly bullish, while U.S. corporate bonds remain unchanged at neutral. With a minimum yield of 6.1% for the US IG Corporate Bond Index and 9.6% for the US HY Corporate Bond, we continue to believe that people are still interested in investing in corporate bonds with the aim of earning medium-term yields while understanding the risk of near-term price volatility.