Weekly Market Trends

Higher Interest Rates Benefit Short-Term Investment-Grade Corporates

Rising interest rates have fueled fears of stagflation and potential economic instability for developing nations. But they have also created an opportunity in short-term corporates, which currently show a more attractive yield-per-unit-of-duration payoff than any other corporate exposure.1


Head of SPDR Americas Research

This article was written with contributions from Martin Dunn. Marty is a Research Strategist on the SPDR Americas Research Team.

Equities climbed last week across all major regions. Emerging markets outperformed developed international and US stocks. And crude oil rallied 16.5% after OPEC+ agreed to the biggest production cut since 2020.2

Nuclear Tensions Rise

North Korea fired a missile over Japan for the first time in five years.3 The move further ratchets up tensions over Kim Jong Un’s nuclear program, as North Korea has launched multiple missiles in the past two weeks.

Fear of Economic Instability Persists

The United Nations has called on multiple central banks, including the Federal Reserve (Fed), to halt interest rate hikes.4 The UN is concerned about stagflation and potential economic instability for developing nations.

The UK’s economy showed signs of contraction in August, as a result of weakness in manufacturing. This has raised concern that the country might be entering a recession.

Inflation in the US, however, while still high is showing signs of easing. The year-over-year US Consumer Price Index (CPI) print on Thursday is expected to moderate to 8.1%, down 0.2% from the last monthly reading. And, Friday’s US Consumer Sentiment is expected to tick up slightly to 58.8 from 58.6, continuing its bounce from the summer low of 50.0.

Rising Interest Rates Make Short-Term Investment-Grade Corporates Attractive

The sharp rise in interest rates has significantly benefited short-term investment-grade (IG) corporate bonds, as they now yield over 5% for the first time since the Great Financial Crisis (GFC)5 — 225 bps above the 20-year average yield.6

Yet the duration of short-term IG corporates has remained relatively flat (currently 1.95 years) given the maturity band focus. This has led to a vastly improved yield-per-unit-of-duration payoff of 2.6 — a higher rate than any other part of the Treasury or IG corporate credit curve.7 In fact, their yield-per-unit-of-duration of 2.6 registers in the 99th percentile post-GFC.8

Source: Bloomberg Finance L.P., December 31, 2003 to October 5, 2022. US 1-3 Year Corp = Bloomberg US 1-3 Year Corporate Bond Index, US 5-10 Year Corp = Bloomberg US 5-10 Year Corporate Bond Index, US 10+ Corp = Bloomberg US 10+ Year Corporate Bond Index, Broad US Corp = Bloomberg US Corporate Bond Index, US Agg = Bloomberg US Aggregate Bond Index. Past performance is not a reliable indicator of future performance.

And when assessing for credit risk, their spreads are below long-term averages — 86 basis points (bps) versus 110 bps — and in line with post-GFC averages of 82 bps.9 This suggests that the extra yield is not from increased credit risks.

Implementation Idea: SPDR® Portfolio Short Term Corporate Bond ETF (SPSB)

The SPDR® Portfolio Short Term Corporate Bond ETF (SPSB) seeks to provide comprehensive exposure to US corporate bonds with a maturity between one and three years. SPSB represents a potentially high-quality value opportunity to pick up yield without taking on any additional duration or credit risk relative to other popular IG markets, and relative to their own historical average. And with a TER of 4 bps, SPSB is cheaper than 95% of its peers and 50 bps cheaper than the median short-term bond fund.10

SPSB Standard Performance as of September 30, 2022

SPSB Standard Performance as of September 30, 2022

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