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Credit Insights

Corporate Bonds Largely Unchanged Following Fed Statement

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While the corporate bond market awaited the Federal Reserve's statement following the September Federal Open Market Committee meeting with bated breath, the market reaction following its release was largely a nonevent. The Fed retained its "considerable time" language as to how long it will keep the federal funds rate at near zero, made a few minor changes to its economic projections, and released a separate statement regarding how the FOMC intends to normalize monetary policy. The market yawned at the news and credit spreads were largely unchanged last week. The 10-year Treasury ended the week at 2.59%, 2 basis points below where it ended the prior week. In the investment-grade sector, the average spread of the Morningstar Corporate Bond Index closed the week where it began at +110 bps. In the high-yield sector, the spread of the Bank of American Merrill Lynch High Yield Master II Index tightened 6 basis points to +397.

In the high-yield sector, junk bond mutual funds and exchange-traded funds suffered another outflow last week, totaling $1.2 billion. While this outflow was not enough to meaningfully affect credit spreads, if this trend continues, it could lead to weakness in the high-yield market as portfolio managers sell bonds to fund redemptions. In July and early August, credit spreads had widened 95 basis points from a low of +335 bps near the end of June to a high of +425 bps in early August.

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

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