Corporate Bond Update

It’s been four weeks since the Federal Reserve announced its latest quantitative easing program, and the performance of equities versus corporate bonds is telling. According to JP Morgan, yields on corporate bonds have fallen by 20 basis points (0.20%) relative to yields on US Treasury notes. This outperformance is in contrast to the performance of equities, which have fallen 2.2% since the Fed made its announcement. Corporate bond outperformance/ underperformance versus US Treasurys is typically highly correlated with equity performance. Why the decoupling of corporate bonds versus equities? The main reason seems to be technical factors, as the Fed’s program forces investors to look to corporate bonds in their search for yield. Equity prices do not have this supply/demand imbalance, and have instead focused on the weaker earnings expected in the third quarter. We believe this creates an opportunity for corporate bond investors to sell securities with weakening fundamentals and to reinvest in other securities that have better risk-adjusted yield profiles.