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Credit Insights

...And What a Week That Was

Next FOMC meeting lining up to be especially contentious.

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Global markets experienced a strong bout of volatility last week. For example, between its intraday high and low, over the course of the week the S&P500 varied by 6.7%. Similarly, the trading range of the 10-year U.S. Treasury bond varied by 30 basis points between its intraday high and low. In the investment-grade corporate bond markets, the average credit spread of the Morningstar Corporate Bond Index had widened as much as 8 basis points before recovering most of the widening and ended the week at +176, only 2 basis points wider. In the high-yield bond market, the average credit spread of the Bank of America Merrill Lynch High Yield Master Index had widened as much as 28 basis points before recovering and ending the week at +572, some 14 basis points tighter. Volatility was so great that the administrators of numerous mutual funds and ETFs were incapable of calculating the net asset values of some portfolios. As such, Morningstar was unable to calculate the weekly fund flows for high yield mutual funds and ETFs.

Last week, we noted that trading volumes in the secondary market were lower than usual as traders and portfolio managers take vacation time during the typical seasonal slowdown in August. With many investors on the sidelines, the trading action in the secondary market was what many traders call "gappy," meaning that there were many instances that after bonds traded, the next trade was conducted at a spread significantly wider (that is, gapped wider) than where the prior trade printed. This type of secondary market action exacerbates the downside as sell-side bond traders become extremely wary of taking down positions onto their own books and will act only as intermediaries as opposed to principals, thus reducing liquidity. This type of trading is indicative of a market where some investors are liquidating positions and are more concerned with selling bonds as opposed to maximizing value.

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