One way to understand where opportunity may lie in the broad fixed-income market is to look at bond spreads — which measure the difference in yield between two bonds with similar maturity, where one has a higher credit rating than the other (e.g., government Treasuries and corporate bonds). 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 relatively 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 May 2023

• Treasury yields and credit spreads largely moved sideways as markets recovered from shocks to the banking sector in March.

• With credit spreads roughly flat across the quality spectrum, lower rated fixed-income sectors outperformed due to their yield advantage. 

• While the announced liquidations of Signature Bank’s and Silicon Valley Bank’s mortgage portfolios are expected to be gradual and orderly, the process could place near-term pressure on agency MBS and lower coupon 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 potential value.

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