One way to understand where opportunity lies in the broad fixed-income market is to look at credit spreads, which measure the difference in yield between a bond and a risk-free benchmark bond (e.g., U.S. Treasuries) with the same duration.

Credit spreads can give investors a quick snapshot of current market sentiment and an indication of relative value across the quality spectrum. Wider spreads (between a bond and the risk-free benchmark) suggest risk is elevated, while tighter spreads suggest risk has decreased. Spreads are continually changing, and those changes are driven by investor perceptions of risk.

When looking at opportunities across fixed income, credit spreads indicate how much more an investor is being compensated for taking on the additional risk. If spreads are above their long-term average, they are referred to as wide; if they're below their long-term average, they are referred to as tight.

Our proprietary Fixed-Income Monitor compares current spreads relative to 20 years of history, across fixed-income asset classes, to help investors identify opportunities across fixed-income sectors.

Key takeaways for September 2023

• The U.S. Treasury yield curve steepened in August. Longer maturity yields reached new highs for this cycle, due to technical factors and upside growth surprises.

• Credit sectors were largely immune from the volatility in government bonds. Lower quality assets, including high yield and leveraged loans, continued to outperform.

• Agency mortgage risk premiums neared all-time highs due to persistent interest rate volatility, representing historically compelling value.

Learn more about the importance of understanding spreads from Gene Tannuzzo, Global Head of Fixed Income.

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