By Matt Wirz 

Investment-grade corporate bonds have been among the poorest performers in debt markets this year and rising U.S. Treasury yields are stoking worries that worse has yet to come.

Investors who hold bonds from highly rated companies lost about 0.90% on average this year through Jan. 20, according to a Bloomberg Barclays bond index reported by FactSet. That compares with a 0.63% return on high-yield bonds and a 0.10% performance from municipal debt.

The market for blue-chip bonds issued by companies such as Walt Disney Co. and Apple Inc. is usually viewed as a safe way for investors to pick up modest yield without exposing themselves to volatility. But the bonds also tend to trade in lockstep with U.S. Treasury bond yields, which rose sharply in recent weeks, fueled by expectations of an economic recovery later this year and rising inflation.

Inflation diminishes the value of the fixed payments bond investors collect and can spur the Federal Reserve to raise interest rates. Prices for bonds outstanding fall when interest rates rise because new bonds pay higher yields.

"The problem for investment-grade credit is it's starting at a very low yield...with very little protection if interest rates rise," said Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman Group LLC, which invests about $179 billion in global debt markets. The money manager began rotating out of the bonds late last year and has instead been buying debt with less interest-rate exposure, such as high-yield bonds, corporate loans and emerging-markets debt, he said.

Prices of investment-grade corporate bonds were broadly lower Thursday as the yield of the 10-year Treasury note rose as high as 1.123% from a close of 1.089% on Wednesday, according to data from Tradeweb. A newly issued bond from Morgan Stanley was the most actively traded investment-grade corporate this morning, falling about 0.80% to 99.53 cents on the dollar, according to data from MarketAxess.

The declines draw a contrast to investment-grade bond performance last year, when the Federal Reserve's decision to slash interest rates in response to the coronavirus pandemic sparked a surge of demand for the corporate bonds. Investment-grade corporate debt returned about 10% in 2020, beating most other credit investments, according to data from Citigroup Inc.

Investment-grade bonds are particularly sensitive to changes in Treasurys because investors buy them based on the additional yield, or spread, they pay over the U.S. government debt. That spread dropped this week to 0.92 percentage points, the lowest level since February 2018, according to FactSet, giving holders of the debt less cushion to absorb further increases in Treasury yields.

Bank of America Corp. research analysts recommended this week that investors reduce their exposure to investment-grade bonds to marketweight from overweight, citing the fall in spreads, which are now at roughly the same level as a year ago, before the pandemic roiled financial markets.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

January 21, 2021 11:27 ET (16:27 GMT)

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