Yield spreads have tightened significantly, whether it be in U.S. high yield, hard currency emerging market (EM) debt or U.S. investment grade bonds. These elevated valuations may be a sign of market complacency, we believe. There is a much thinner yield cushion against the risk of rising interest rates then in the recent past. See the chart below. The Fed appears aware of this risk, so is proceeding cautiously and gradually with rate rises.
Valuations signal “risk-on”
Bond spreads, 2011-2017
Sources: BlackRock Investment, Bloomberg and JP Morgan, March 2017.
Notes: Yield spreads are versus U.S. Treasuries. U.S. investment-grade and high-yield debt spreads are based on Bloomberg Barclays indices. The EM hard-currency debt spread is based on the JPMorgan Emerging Market Bond Index.
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