Line chart showing investment grade, high yield, and emerging markets credit spreads from January 1, 2006, to March 31, 2024. Investment grade credit spreads are typically the lowest, and high yield credit spreads are typically the highest. Credit spreads for all indexes shown increase during times of economic stress, like the 2007-2009 recession, U.S. debt downgrade in 2011, U.S. economic growth concerns in 2015, the 2020 recession, and global growth concerns in 2022 and 2023. Credit spreads have come down from 2020 levels but rose again in 2022. Spreads began moving down at the beginning of 2023 but have been rangebound for most of the year. Most recently, spreads ticked lower in the fourth quarter of 2023.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2006, to March 31, 2024. For illustrative purposes only. Option-adjusted spread is the difference in yield over equivalent-duration Treasuries. Duration is a measure of interest rate sensitivity. 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 (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
- Investment-grade and high-yield credit spreads narrowed further in the first quarter as credit-risk appetite remained strong. A still-resilient global economy and somewhat range-bound U.S. rates helped to tighten emerging market sovereign spreads.
- We expect spreads of high-quality and low-quality bonds to widen as a potential economic slowdown takes hold. At this time, we believe credit selectivity is key.