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Credit Insights

Skeptical Corporate Bond Market Ignores BOJ's Negative Interest Rate Policy, Waits for Yellen's Testimony

Economic conditions not as bad as headlines appear.

Two weeks ago, the Bank of Japan announced that it would begin a negative interest rate policy. Most asset markets popped higher on the news, as many investors thought this monetary action would help stoke global economic growth. However, the corporate bond market did not strengthen as other risk assets did and seemed to be skeptical that the monetary policy action would be the panacea to cure economic ills. This foreshadowing by the corporate bond market was borne out last week as the temporary pop in asset prices was short-lived and most markets slid lower. In the equity markets, the S&P 500 dropped 3.1% and among the major commodities, oil fell $2.75 to $31 per barrel.

The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade corporate bond market) widened 7 basis points last week to +205. The spread of the Bank of America Merrill Lynch High Yield Master II Index widened 36 basis points to +810. Further highlighting the low demand for risk assets, the new issue market for corporate bonds came to a near standstill. The window to the new issue market for corporate bonds was not necessarily closed, but only a handful of issuers braved the market volatility. Typically, issuers and their investment bankers will decide early in the morning if market conditions support bringing new deals to market. Considering the volatility in both the overnight and premarket markets, these go/no-go calls required a high degree of agility, as oftentimes what appeared to be a supportive market overnight quickly turned downward as U.S. equity futures markets opened.