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Credit Insights

Markets Roiled by Fed's Threat to Take Away the Punch Bowl

Corporate bonds suffered a double whammy as interest rates rose and credit spreads widened.

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Corporate bonds suffered a double whammy as interest rates rose and credit spreads widened after Federal Reserve chairman Ben Bernanke insinuated that the Fed would begin to slowly reduce its asset purchase program as soon as this fall. We have previously speculated that once the Fed decides to begin reducing its purchases, it would do so by increments of $10 billion-$15 billion per month. During the question-and-answer period, Bernanke hinted that that the asset-purchase program could be wound down by the middle of next year. 

If the Fed begins to taper as soon as this September, then it appears that the monthly purchases would decline in this range. The markets were also pressured on Thursday by the release of HSBC's Flash China Manufacturing PMI, which registered 48.3, its lowest level in nine months (a reading below 50 indicates slowing activity). Considering that China is the second-largest economy in the world and has been a significant importer of commodities and raw materials, investors are concerned that if its economy slows too much, it could hamper global GDP expansion.

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