Credit market spreads

Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2006 to September 30, 2022. For illustrative purposes only. Option-adjusted spread is the difference in yield over equivalent-duration Treasuries. USD = U.S. dollar. Investment grade represented by Bloomberg U.S. Aggregate Bond Index. High yield represented by Bloomberg U.S. Corporate High Yield Bond Index. Emerging markets represented by J.P. Morgan Emerging Markets Bond Index Global (USD). Bloomberg U.S. Aggregate Bond Index is a broad-based index that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. J.P. Morgan EMBI Global Index (USD) is a U.S.-dollar-denominated, investible, market-cap-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt. Index returns do not represent investment performance or the results of actual trading. Index returns represent general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Foreign investing has additional risks including currency, transaction, volatility and political and regulatory uncertainty. These risks are heightened in emerging markets.

Key Takeaways

  • Credit spreads were volatile in the third quarter, initially tightening on hopes of an early end to the Federal Reserve’s rate-hike cycle, then re-widening as the central bank pushed back. Emerging market sovereign credit spreads remain relatively contained, despite global recession fears, with performance hurt more by higher U.S. Treasury yields than wider spreads.
  • We expect spreads of high-quality and low-quality bonds to widen further as the economic slowdown and a potential recession takes hold. At this time, we believe credit selectivity is key.