Monday, October 11, 2010

Corporate Bond Performance

Year to date performance of corporate bonds (investment grade rated bonds AAA --> BBB / high yield bonds rated below BBB) is shown below. What is rather (in my opinion) amazing is that the top performing corporate bond quality by rating (BB) are up only ~4% from the bottom performing corporate bond quality by rating (AA).

Why amazing? Take a look at the below, which details the top performing corporate bond quality by rating and the bottom.

Some initial thoughts that come to mind...

The Fed has been performing a balancing act due to the slow down in
growth (i.e. when high quality assets "should" outperform) by providing a TON of liquidity (i.e. when low quality assets "should" outperform). The fact that all corporate bonds by quality are performing relatively in-line (and doing well in absolute terms) shows me that the Fed is doing their job quite well or that the market does not know how to interpret what they are doing, thus not differentiating between high and low quality (I am inclined to think the latter).

And because I was digging through data... some longer term analysis of the various quality by rating of corporate bonds (annualized performance vs. annual volatility). Broadly, more risk = more return until an investor reaches too much for yield (below BB). Note that information ratio below is defined as excess risk to T-Bills / annual volatility.

Source: Barclays Capital

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