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Credit Insights

Volatility Ramps Up and Spreads Reverse Course

Fed on hold; lowers longer-term rate hike forecast.

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Last week, volatility picked up and spreads widened ahead of Britain’s June 23 vote on whether to exit the European Union. The VIX jumped from 14 on June 9 and to above 22 on June 14, the day before the Federal Open Market Committee meeting. Those levels hadn’t been seen since mid-February amid the commodity sell-off and bottoming of crude oil prices. The volatility indicator closed the week at 19.4. Credit spreads are typically correlated with the VIX, as greater fear or uncertainty equates to higher risk premiums. Indeed, spreads have moved wider. The Morningstar Corporate Bond Index was at +147 basis points June 8 after mild tightening in the week or so prior and subsequently widened to +154 bps on June 17, a 5% increase. High-yield spreads, as measured by the Bank of America Merrill Lynch High Yield Index, similarly bottomed on June 8 at +586 bps but then widened to +621 bps on June 17. Treasuries, however, continued their one-way move down over the past month. The 10-year traded as low as 1.52% intraweek, but ended up closing at 1.62%, 2 basis points tighter on the week. Yields are 26 basis points lower since May 18.

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