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Credit Insights

Robust Liquidity Returns to Corporate Bond Market

New issue market reaches new volume records

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Following the Thanksgiving holiday, robust two-way flows returned as the buyers who had been missing from the marketplace showed up. Liquidity improved significantly across the market, although one trader noted that it was still difficult to move 30-year off-the-run bonds. New issue bonds generally performed well in the secondary market and caught a strong bid Thursday and Friday. For example, Amazon's (AMZN) (rating: A-, wide moat) 3.80% senior notes due 2024 tightened from their new issue spread of +155 to +144, Becton Dickinson's (BDX) (rating BBB+, narrow moat) new 10-year bond tightened 15 basis points to +135, and Medtronic's (MDT) (rating: A, wide moat) new 10-year bond tightened 17 basis points to +123. We were not surprised by the level of tightening, as our published fair value estimates on the new notes were +120, +140, and +115, respectively.

Although the new issues performed well and most sectors tightened a few basis points, the average spread of the Morningstar Corporate Index widened 1 basis point to +133. This is the widest level the index has registered this year and is at its widest since December 2013. The widening was predominantly driven by the energy sector, as rapidly declining oil prices have weighed heavily on the sector. Within our investment-grade bond index, the energy sector widened out 10 basis points last week and has widened out 52 basis points year to date. Similarly, the average spread of the Bank of America Merrill Lynch High Yield Master II Index widened almost 13 basis points to +477. Within the high-yield index, the energy sector had widened +100 basis points last week to +687 and has widened 300 basis points year to date.

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