A compelling case for high-quality corporate bonds
Background on the corporate bond market
It’s no secret that investors have lived through a low interest rate environment for much of the last two decades. The Federal Reserve (the Fed) suppressed interest rates for years following the global financial crisis of 2007-2009, and then again following the COVID-19 pandemic. Over the last two years, however, robust U.S. economic growth and inflation prompted the Fed to aggressively raise short-term interest rates, leading to sharply higher bond yields across the maturity spectrum.
Correspondingly, investors may have an opportunity to invest in corporate bonds with yields that are more attractive than we’ve seen in approximately 15 years. In addition, with the Fed’s current rate hiking cycle potentially over, now may also be a good time to add duration in anticipation of falling yields and potential capital gains down the road.
The highest corporate bond yields since 2009
At the end of 2023, the average yield on high-quality corporate bonds—as represented by the Bloomberg US Corporate Bond Index—exceeded 5.0%, the highest since 2009. And while yields may be elevated due to the current environment, company financial performance has remained strong, and default risk—as measured by credit spreads—has remained low. This means that investors may have the opportunity to invest in bonds from high-quality companies at attractive absolute yields.
Exhibit 1: Exhibit 1: High-quality corporate bond yields are in rare territory
Yields on high-quality corporate bonds finished 2023 near their highest levels since 2009.
Sources: Schwab Asset Management; Bloomberg, monthly data from 12/31/08 to 12/31/23. High-quality corporate bond yields represented by the yield to worst of the Bloomberg U.S. Corporate Bond Index.
Past performance is no guarantee of future results. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
Our viewpoint on this relative value opportunity
The peak level we will see in yields this cycle is unknowable. However, inflation finally appears to be cooling, and both the markets and the Fed’s dot plot are currently forecasting interest rate cuts here in 2024. So, we believe that the current environment offers an attractive opportunity to invest in high-quality corporate bonds and potentially extend duration in the process, given how long it has been since yields were last around these levels.