Yield Is Back. But Where Is It Coming From?

Higher bond yields now give investors meaningful income, but the article argues that the key issue is whether each additional risk is adequately compensated.

• A bond’s yield combines the comparable U.S. Treasury base rate with a spread compensating for credit, liquidity and other risks.
• For the Bloomberg U.S. Corporate Bond Index, credit spread represented about 34-35% of yield to worst on average over the period studied, versus roughly 13-14% today; more than 85% of the current yield therefore comes from the base rate.
• Strong corporate fundamentals, resilient economic growth and sustained demand can keep spreads tight, but investors still face downgrade, liquidity and spread-widening risks.
• During the Global Financial Crisis and the start of the COVID-19 pandemic, spreads made up a much larger share of corporate yields, whereas today absolute yields are high and incremental credit compensation is comparatively modest.
• The Bloomberg U.S. Aggregate Bond Index holds Treasuries, agency mortgages and investment-grade corporate bonds according to eligibility rules and debt outstanding, not according to whether each sector adequately compensates its risks.
• Investors can start with base-rate income and add duration, credit, mortgage or securitized-sector risk selectively, adjusting exposures as relative value changes.

Takeaway: Higher rates allow fixed-income portfolios to be more selective, so investors should focus less on headline yield and more on which risks generate it and whether the compensation is sufficient; the article does not argue that corporate bonds are broadly unattractive or predict when spreads will widen.