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Credit Insights

Heightened Volatility Results in Sloppy Corporate Bond Trading

While marriages are increasing in the health-care sector, conscious uncoupling increases in the technology sector.

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The trading activity in the corporate bond market was described as "sloppy" by one trader last week because of the heightened daily volatility in the stock market. Even after accounting for the snapback rally Wednesday, the path of least resistance over the course of the week was downward. However, while the market softened over the course of the week, portfolio managers were not panicking or indiscriminately hitting any bids that appeared. There were plenty of bid wanted lists, but if investors were not getting the prices they thought were reasonable, then the bonds did not trade and were held back until the tone improved on another day. The sell-off in the equity market is leaving many investors feeling queasy; nevertheless, to put the pullback in the equity market into perspective, the S&P 500 has fallen only 5.6% from its high and year to date has risen 3.13%.

In the investment-grade sector, the damage was relatively contained as the average spread in the Morningstar Corporate Bond Index widened out only 2 basis points to +120. Last week we speculated that the combination of strong employment growth and wide credit spreads would prompt investors to reallocate assets into high yield and inflows would resume. We were correct that fund flows into high-yield mutual funds and exchange-traded funds through Wednesday rose $1.2 billion; however, since the high-yield sector is highly correlated to the stock market, the average spread in the Bank of America Merrill Lynch High Yield Master II Index widened 37 basis points to +466 despite the fund flows. This is the widest spread this index has registered since October last year.

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

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