20
At this point you’ve probably heard that May
2013
was a bad month for bonds. With the exception
of the shortest-dated debt, Treasury bond yields in-
creased across the maturity spectrum by similar
amounts; the
10
-year note gapped out roughly
50
basis points during the month. With a few exceptions,
longer-maturity Treasuries naturally lost more
than their shorter cousins. The losses incurred were
some of the sharpest suffered over a single month
in a long time. The Barclays U.S. Treasury Index
tumbled
1
.
70%
.
If you’ve been listening to the pundits, meanwhile,
you also probably know that
PIMCO Total Return
PTTRX
suffered losses last month—it fell
2
.
15%
.
Interestingly, the fund’s outsized pain didn’t trace
back to its increased stake of conventional Treas-
uries from the month before, but mostly to a long-
standing long-maturity allocation to Treasury Inflation-
Protected Securities (and a bit to the fund’s
8%
emerging-markets allocation). At the same time, the
Barclays Aggregate U.S. Bond Index fell
1
.
80%
,
while the average intermediate-term bond fund got
the better of both with a
1
.
60%
loss.
More Than Meets the Eye
In fact, there’s more to the May story than just Trea-
suries. Some of the most credit-sensitive—and
therefore more yield-rich—sectors were cushioned
from that market’s influence, and Barclays’ high-yield
index dropped only
0
.
58%
for the month. Lost in
the headlines, however, was that, in addition to
TIPS
,
higher-quality corporate bonds also endured par-
ticularly hefty losses: Barclays’ U.S. corporate-bond
benchmark actually fell even more than its Treasury
counterpart with a
2
.
30%
loss.
There’s some interesting nuance to those numbers.
The yield spread between the corporate and Treasury
indexes actually contracted by a few basis points
during May, suggesting that investors weren’t making
a statement that corporate bonds were any less desir-
able than Treasuries. On the other hand, it does help
highlight the fact that the high-quality corporate-bond
market is plenty sensitive to interest-rate moves. In
part, that’s because the corporate-bond market skews
to longer-maturity issuance than the Treasury market
currently does. But it also highlights that corporate
yields have come in so close to Treasuries’ in recent
years that their fortunes have for now become inter-
twined. In fact, that “yield spread” is now tighter than
at any time since before the financial crisis.
Back in the Day
The Treasury and corporate indexes have years of
history during which their returns—and directions—
were closely linked. Things cracked a little in the
early part of the
2000
s but really broke apart in
2007
when financial-crisis worries began sending the
two sectors in opposite directions. They’ve converged
again for stretches since the crisis but have other-
wise shown a lot of independence, as in
2012
, when
their return gap was a healthy
783
basis points.
Returns of the two indexes have again converged
over the past several months. The indexes’ returns
have been highly correlated for the year to date
through May
31
and were separated by only
33
basis
points, as compared with big
2012
gap.
That’s a reminder that despite—or, in fact, because
of—the fat overall returns for corporate bonds since
the financial crisis began to soften in early
2009
,
high-grade corporate bonds have become a lot more
of what they once were, modest providers of excess
yield, but also with considerable interest-rate expo-
sure. It is therefore worth taking a good look at your
portfolio and eyeballing just how much of your credit
exposure comes in the form of high-quality corporate
bonds. A large number isn’t necessarily bad, but,
at least for now, it doesn’t appear to offer much diver-
sification from Treasuries, either.
œ
Contact Eric Jacobson at
Digging Into the Big Bond Backup
Income Strategist
|
Eric Jacobson
