EXCLUSIVE: Yield Surge Reveals Investment-Grade Corporate Bonds As Potential Goldmine

The bond market has stormed back into the spotlight this week, with Treasury yields at maturity reaching levels unseen in over a decade.

The benchmark 10-year yield soared past the 4.30% mark, marking its highest point since November 2007. Simultaneously, the yield on the 30-year long bond surpassed 4.40%, hitting a peak last seen in May 2011.

Yield Jitters Prompt Questions About Bond Market Entry

The swift surge in bond yields has ignited responses from market participants, prompting questions about the optimal timing for entry into the bond market after the challenges endured over the past two years.

Benzinga interviewed Jay Menozzi CFA, the chief investment officer and portfolio manager for Orange Investment Advisors, an affiliate of Easterly Funds, who shed light on the bond market dynamics.

“The recent sell-off in the long end of the Treasury yield curve seems to have been catalyzed by Fitch’s downgrade of the U.S. credit rating from AAA to AA+. This downgrade highlighted the funding pressure the Treasury is facing, given the significant supply of treasuries expected to enter the market,” Menozzi explained.

He also projected reduced demand for Treasuries by the Federal Reserve and Japanese investors, two major holders of U.S. government bonds.

Market Implications and Opportunities Unveiled

Menozzi delved into the implications of the yield surge on the stock market, noting, “rising yields tend to affect growth stocks more than value stocks due to the longer duration of growth stocks.”

With the imminent Fed’s Jackson Hole Symposium, Menozzi hinted at a potential shift towards a slightly more hawkish stance by the Federal Reserve.

“Bonds are becoming increasingly attractive as yields rise,” Menozzi said, while emphasizing the potential for attractive total returns in credit markets, despite the short-term volatility.

Investment-Grade Corporate Bonds Emerge as Gems

Investment Grade corporate bonds, even those rated AAA, are now attainable at yield spreads over Treasuries spanning hundreds of basis points, Menozzi stated.

The effective yield on the corporate investment-grade universe, tracked by the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, has climbed to 5.9%, reaching its zenith since November 2022, currently offering 130 basis points of spread over Treasuries.

“Focusing on the upper part of the capital structure allows us to harness these attractive yields while minimizing exposure to undue credit risk. By positioning investments smartly within the bond market, one can potentially capitalize on the current opportunity,” Menozzi said.

Chart: US High-Grade Corp. Effective Yield