Buoyed by the Fed, Investment Grade Bond Market Hits New Highs

As of Tuesday of this week, the iBoxx USD Liquid Investment Grade Index, which tracks the performance of U.S. dollar-denominated investment-grade (IG) corporate bonds, hit both YTD and all-time highs.

Bigger, faster drawdown than Great Financial Crisis

Why is this remarkable? Because during the depths of March, the investment-grade corporate bond market was dealt a massive blow, falling 18.88% in just 11 trading days. In comparison, the maximum drawdown for IG corporate bonds in 2008 was 15.67% over a much longer duration of 196 trading days.

Both the speed and magnitude of this year’s IG drawdown far exceeded what we saw during the Great Financial Crisis, which is why it’s striking now to see the market come back as strongly as it has.

From this year’s bottom, the IG corporate bond market has rebounded 24.34% YTD. Why the comeback? Because…the Fed.

Fed corporate bond backstop buoys market

On March 23rd, the Federal Reserve announced its intention to start purchasing corporate bond ETFs as part of its widespread emergency relief fund, which immediately boosted investor sentiment. On May 12th, the Fed began making purchases and is now the 4th largest holder of LQD, an ETF that tracks the iBoxx IG index.

While the Fed has said it may slow the pace of corporate debt purchases if markets continue to improve, bond issuers and investors appear to have faith in the Fed’s readiness to continue to buoy credit markets as needed, even if more defaults were to happen as a result of Covid-19’s economic impact.

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