Sunday, October 19, 2008

Corporate Bonds: Year-to-Date Price Performance Along the Yield Curve


Above we see year-to-date price performance for four corporate bond funds in the Vanguard family: short-term investment grade (VFSTX); intermediate-term investment grade (VFICX); long-term investment grade (VWESX); and high yield (VWEHX).

What we see is that, as the yield curve has steepened, longer-term bonds have dramatically underperformed shorter-term ones.

Even more dramatic is the way that high-yield bonds have underperformed investment grade offerings. The bonds in VWEHX are roughly the same in maturity as those in VFICX, yet it has been almost twice as weak in price performance.

The bottom line is that reaching for yield--either by going further out on the curve or by compromising bond quality--has hurt investors. Conversely, short-, intermediate-, and long-term Vanguard funds for Treasuries have all seen price gains on the year. Safety has ruled the roost for 2008; this remains an excellent market sentiment indicator.
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2 comments:

Michael Shedlock said...

Thanks Brett.
Mish

Armageddon in Corporate Bonds
http://globaleconomicanalysis.blogspot.com/2008/10/armageddon-in-corporate-bonds.html
I have been warning everyone about corporate bonds specifically because of rising default risk and rollover risk for quite some time. And indeed Corporate bonds are getting crushed. Here is a chart of Moody's Seasoned Baa Corporate Bond Yield. ...
Mish

Brett Steenbarger, Ph.D. said...

Thanks, Mish; I like the bond analysis on your blog and just recently linked your interesting post on frugality--

Brett