Monthly Market Snapshot

While high yield (HY) bonds are often viewed as a single asset class, the credit quality composition of the HY market has changed meaningfully over time. Today, nearly 60% of ICE BofA US High Yield Index is comprised of BB-rated issuers, compared to just 37% prior to the Great Financial Crisis (GFC), while the share of lower-rated B and CCC bonds has declined substantially.

High Yield Index Composition

The shift toward higher-quality issuance has been driven by a combination of rising stars, stronger corporate balance sheets, and more speculative issuers accessing capital from alternative markets such as levered loans and private credit. While high yield bonds continue to carry greater credit risk than investment grade (IG) securities, today's market is generally higher quality and less reliant on the most speculative issuers than it was in 2007.

Data source: ICE Data Indices, LCD, BofA Global Research. For educational purposes only. Advisory services are offered through Segall Bryant & Hamill, LLC, d/b/a CI SBH Asset Management (“SBH”), a registered investment adviser with the U.S. Securities and Exchange Commission. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index.

July Recap: Higher Yields Weigh on Fixed Income Markets

  • Treasury yields moved higher across most of the curve in July, with the largest increases occurring in intermediate and long maturities. The 10-year Treasury rose 27 basis points to 4.71%, while the 30-year Treasury increased 32 basis points to 5.25%.
  • Higher Treasury yields weighed on fixed income returns during the month. The Bloomberg U.S. Aggregate Index returned -1.30%, while investment grade corporates, municipals, and Treasuries all posted negative returns.
  • High yield corporates were among the strongest-performing fixed income sectors, supported by higher income and shorter durations.
  • Investment grade and high yield spreads widened modestly during July, but both markets remain near the tighter end of their historical ranges. Lower-rated investment grade bonds and single-B rated high yield bonds led relative performance within their respective markets.
  • The Fed held rates steady at its July 29th meeting, though several policymakers favored a rate increase, highlighting ongoing debate around inflation risks.

Market Summary

Rising Treasury yields pressured most fixed income sectors in July, particularly longer-duration assets. HY corporates were relatively resilient, while municipals and IG corporates posted the weakest returns.

YIELDS & RETURNS (%) 1

U.S. Treasury Market

Treasury yields moved higher across most of the curve in July, with the largest increases occurring in intermediate and long maturities. The moves contributed to negative returns across longer-duration fixed income sectors.

TREASURY YIELDS (%) 1

For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index.

Higher Treasury yields resulted in negative returns across most maturities during July. Longer-duration bonds experienced the greatest decline, while short-term Treasury bills continued to benefit from their limited interest rate sensitivity and positive yields.

TREASURY RETURNS (%) 1

Investment Grade

Investment grade sectors posted negative absolute returns in July, with all but asset-backed securities (ABS) underperforming similar-duration Treasuries. Shorter-duration sectors such as agencies and ABS performed the best, while long corporates lagged amid the rise in long-term rates.

INVESTMENT GRADE INDEX & SECTOR RETURNS (%) 1

Investment grade spreads widened modestly in July. Despite the increase, spreads remain near the tighter end of their historical ranges.

INVESTMENT GRADE SPREADS (basis points) 1

Lower-rated investment grade bonds generally outperformed higher-rated issues during July. AAA- and AA-rated bonds lagged, driven largely by their longer duration profiles. 

INVESTMENT GRADE CORPORATE CREDIT QUALITY RETURNS (%) 1

For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index.

Investment grade sector spreads were mixed during July, with communications and technology recording the largest widening. Most other sectors were relatively stable.

INVESTMENT GRADE CORPORATE BOND SPREADS BY SECTOR (basis points) 1

High Yield

High yield corporates outperformed most fixed income sectors in July, supported by higher coupon income and shorter durations. Single-B rated bonds generated the strongest performance within the high yield market.

HIGH YIELD SECTOR RETURNS (%) 1

HIGH YIELD OPTION-ADJUSTED SPREADS (OAS) (basis points) 1

High yield spread moves were mixed in July. Energy remained one of the strongest areas of the market, while communications, transportation, and technology experienced the largest spread increases.

HIGH YIELD CORPORATE BOND SPREADS (OAS) BY SECTOR (basis points) 1

For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index.

High yield default activity remained stable during the month. The issuer default rate was unchanged at 2.9%, remaining below long-term averages.

HIGH YIELD DEFAULT RATES 2

Municipals & Other

Municipal bonds produced negative returns across the curve in July as yields moved higher. Long-duration municipals experienced the largest decline.

MAJOR MUNICIPAL BOND INDEX RETURNS (%) 1

MUNICIPAL YIELDS BY RATING CATEGORY AND MATURITY (%) 1

AA MUNICIPALS – HYPOTHETICAL AFTER-TAX YIELDS BY EFFECTIVE TAX RATE (%) 3

Leveraged loans were the strongest-performing “other” sector in July. Emerging markets and global government bonds posted modest declines, while convertibles were notably weaker in the month.

OTHER SECTOR RETURNS (%) 1,4

For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index. All opinions expressed in this material are solely the opinions of SBH. You should not treat any opinion expressed as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this material does not constitute financial, legal, tax or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s statements and opinions are subject to change without notice, and SBH is not under any obligation to update or correct any information provided in this material.

 

1Source: Bloomberg.

 

2Source: Bank of America Merrill Lynch.

 

3Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.

 

4Source: Standard & Poor’s.

Bond Rating Categories

Standard & Poor’s Ratings Group

AAA An obligation rated “AAA” has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

 

AA An obligation rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

 

A An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher- rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

 

BBB An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these July be outweighed by large uncertainties or major exposures to adverse conditions.

 

BB An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

B An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

 

CCC An obligation rated “CCC” is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

 

CC An obligation rated “CC” is currently highly vulnerable to nonpayment.

 

C A subordinated debt obligation rated “C” is currently highly vulnerable to nonpayment. The “C” rating July be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.

 

D An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.