Spreads for high yield and investment grade bond indices are starting to move higher, yet the overall levels are still around pre-COVID levels. Debt risk will increase from higher inflation uncertainty and a move by the Fed to start raising rates, but portfolio risks are still limited. Nevertheless, a more uncertain earnings and equity environment will spillover to credit markets.
Any spread widening for high yield indices will have a lower total return impact. The investment grade ETF benchmark LQD has a modified duration of 9.66 while the benchmark HYG has a modified duration of 4.24 years. The ICE BAML high yield benchmark has a modified duration of 3.78 and the investment grade index modified duration is at 8.7 years. Lower rates bonds rated CCC have even lower duration. A rate rise will have less of an impact on these lower-rated debtors; however, the high yield issuers will have to roll their debt sooner, so there are heightened financing risks.
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