Mar 1, 2023 - Economy

February bond slump whittles away at January’s gains

ICE BofA U.S. High Yield Index total return
Data: ICE Data Services; Chart: Tory Lysik/Axios Visuals

Corporate bond performance so far this year basically divides into a tale of two months. The dividing line: The jobs report released on Feb. 3.

The big picture: The soft landing story got increasingly believable over the end of last year, and into the beginning of this year.

  • "We started off this year continuing to get positive data that made people less concerned about the U.S. falling off a cliff into a recession — but it wasn't on fire to the point where people were concerned that the Fed would have to hike much more aggressively,” says Lindsay Rosner, principal on the multi-sector portfolio management team for PGIM Fixed Income.
  • Plus, inflation prints were retreating from last year's highs.
  • Investors returned to high yield corporate bonds in droves in a "feel-good rally," Rosner says.

Then: Along came jobs data, inflation figures, and spending numbers that were all hotter-than-expected.

  • That all added up to a growing sense that the Fed's work to cool the economy was far from done, and rates will probably stay higher for longer. It sparked a sell-off in Treasuries and corporate debt over the course of February.
  • High yield funds last week experienced their largest net outflow since 2014, according to a BofA Research note.

What to watch: This level of volatility "is probably going to be the norm for a little while, because the reality is we don't know how fast inflation is going to come down. We don't know how aggressive the Fed has to be," says Will Smith, director of U.S. high yield credit at AllianceBernstein.

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