One way to understand where opportunity lies in the broad fixed-income market is to look at bond spreads — which measure the difference in yield between a bond and a risk-free benchmark like U.S. Treasuries. Our proprietary Spread Monitor measures this difference by examining more than 20 years of data.

Yield spreads can give market observers a quick snapshot of sentiment. For instance, when investors become risk-averse and favor safer bonds, yield spreads widen, and investors are “paid more” to take on risk. Comparing current spreads relative to historical levels helps investors evaluate opportunities across fixed-income sectors.

Key takeaways for September 2022

• Volatility was high last month. Spreads rallied early, only to sell off and close flat month-over-month.

• Macroeconomic headwinds and poor technicals (demand/supply factors) keep our outlook mostly negative, which reduces our appetite for risk in deeper corporate and consumer credit.

• Areas of opportunity remain in structured credit, including higher coupon Agency MBS. Within Non-Agency MBS we prefer higher quality/seasoned bonds.

Bottom line

Credit spreads are one metric that investors can use to gauge the appropriateness of risk compensation in the bond market. A more thorough understanding of risk versus reward allows us to identify opportunities as they emerge and position portfolios for value.

Learn more about the importance of understanding spreads from Gene Tannuzzo, Global Head of Fixed Income.

Download transcript

Download this article as a PDF