Investment grade credit spreads performed well in the fourth quarter, with the option-adjusted spread on the Bloomberg Barclays Corporate Bond Index tightening 15 basis points (bps) to 123 over the three-month period ending December 31, 2016. This compares to 165 bps at the beginning of the year. In what has become a familiar theme, lower quality outperformed. In fact, the lowest quality portion of investment grade has been the outperformer in every one of the past six months. In stark contrast to credit, however, U.S. Treasuries sold off sharply during the quarter, before recovering slightly into year-end.
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