Credit Markets Sell Off on Global Economic Weakness Even Though U.S. Economy Remains Resilient
Boosting 2015 GDP expectations.
The corporate bond market opened to the downside last week and slid further from there. It tried its best to recover on Friday, but gave up its gains in the afternoon. Over the course of the week, the average spread of the Morningstar Corporate Bond Index widened 5 basis points to +179 bps over Treasuries, and the Bank of America Merrill Lynch High Yield Master Index widened 35 bps to end the week at +615. These levels represent their weakest points since recovering from the Greek sovereign debt crisis in mid-2012. In the investment-grade index, the worst-performing sectors were once again the basic industries and energy sectors. The average spread of basic industries widened 19 bps to +274 and energy wasn't far behind, widening 17 bps to +270. In the high-yield index, the energy sector widened 68 bps to +1,049 and the metals and mining sector widened 70 bps to +1,259.
At the beginning of the week, the main concern was that since the Federal Reserve did not begin to raise rates the prior week, it may be concerned that either the U.S. economy is weakening or the global economy is even weaker than current economic metrics indicate. This concern was reinforced in the middle of the week when Markit's Purchasing Managers' Index reports were released. China's manufacturing PMI report fell to 47.0 from 47.3, its lowest level in 78 months. A reading below 50 suggests economic contraction whereas a reading above 50 indicates economic expansion. This is the third consecutive decline in China's manufacturing PMI, and over the course of the past 12 months, this reading has been at or above 50 only three times. While still registering above the demarcation line for expansion, the European manufacturing PMI also slid three tenths to 52.0; this is also the third consecutive decline. According to Markit, the European PMI readings "indicate that the eurozone economy expanded 0.4% in the third quarter, in line with the second quarter" and "puts the economy on course to grow by just 1.6% this year." The manufacturing PMI in the United States remained stable at 53.0, but that is the lowest the index has registered over the past year.