Equity Market Assumes Rates Will Stay Low for Longer; Corporate Bond Market Not Quite as Convinced
Fed intimates that rates will rise at a slower pace.
The equity market rose sharply off its lows after the Federal Open Market Committee released its meeting statement and updated economic projections. Based on the changes in the FOMC's language and revisions to its economic forecasts, equity investors are betting that the Fed will keep short-term interest rates lower for longer. The corporate bond market, however, is not quite as convinced.
Corporate credit spreads initially widened at the beginning of last week. The corporate bond market was having a tough time digesting the vast amount of new corporate bonds that had been priced over the prior three weeks, and declining oil prices pressured credit spreads in the energy sector. The tone of the corporate bond market changed for the better after the FOMC statement, but credit spreads were unable to fully retrace the amount they widened out earlier in the week. Traders began to cover short positions and higher bids from institutional investors quickly followed, yet the demand was not great enough to push corporate bonds up to the same degree that equity prices rose.