The 10-year U.S. Treasury yield touched 3% last week for the first time in more than four years–inciting much hand-wringing. Yet we believe another milestone is of far greater significance to investors: Yields on short-term U.S. investment grade (IG) corporate bonds also hit 3%—an eight-year high.
Investors have piled into riskier assets in search of higher yields, as short-term interest rates have hit rock bottom over the past decade. Short-term U.S. investment grade corporate bond yields have mostly languished below 2% since 2010 while two-year U.S. government bond yields have hobbled below 1%, as the chart shows. Yields on both have increased this year, with the corporate bond yield breaking above 3% and Treasury yield rising to just shy of 2.5%. For the first time since the global financial crisis, investors can earn positive after-inflation returns from these bonds. To be sure, rates are much lower in developed markets outside the U.S. Yet greater competition for capital from U.S. shorter-duration bonds has implications across asset classes.