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Over the last two months, spreads have widened well beyond the long-term average, creating a buying opportunity.

Since the beginning of March, high-yield corporate bond spreads, the additional yield over U.S. Treasuries that investors receive for assuming credit risk, have moved from slightly below the long-term average to well above. This was a result of increased uncertainty about the impact of the COVID-19 pandemic, the potential negative economic impact, and an investor flight to quality that weighed on risk assets. The chart above shows credit spreads have widened to the current level only a few times over the past 30-plus years.

Historically, similar periods of spread widening have represented a compelling opportunity to buy high-yield bonds. Purchasing high-yield bonds at wider spreads has led to strong future total returns through a combination of higher yields and price appreciation as spreads return to more a normal range. While near-term spread movements are difficult to predict, owning high yield at current levels is expected to result in higher excess returns versus core bonds over a medium-term horizon.

We expect volatility could continue until greater clarity can be achieved, which could push spreads wider and weigh on near-term performance for high-yield bonds. We certainly don’t expect to time the “bottom,” but for investors with a multiyear investment time horizon, we believe the return potential for high yield is compelling.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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