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Credit Insights

Volatility Only a Trader Could Love

Volatility in the credit markets will continue for the foreseeable future.

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It was a holiday-shortened week last week, and traders quickly left for the Hamptons after lunch on Friday, but the action in the interim was fast and furious. High beta bonds tightened 5-7 basis points a day during the week. Positive economic metrics such as renewed strength in the ISM report the prior Friday, better-than-expected same-store sales, and a strong ADP National Employment Report buoyed sentiment. However, those same high beta issues gave back a significant amount of their gains Friday morning after the employment situation report showed abysmal job growth.

A confluence of factors drove credit spreads tighter and faster than we would typically witness. Real-money accounts (considered to be long-term, buy-and-hold investors) were buying bonds as they continue to be comfortable owning credit risk of U.S.-based issuers. Fast-money accounts (such as hedge funds that quickly move in and out of positions) swiftly tried to cover any short positions that they initiated at the end of last month when spreads started widening on sovereign credit fears. Dealer inventories were light going into the week, and investors found that by the time they called dealers to lift offers, many times those positions were already sold. In fact, one dealer saw some trades that occurred off bid-wanted lists that priced through the offer side (meaning investors were willing to buy bonds at a higher price than indicative quotes).

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.