Third-Largest Corporate Note Offering Easily Digested by Bond Market
Underlying market action revealed the depth of demand for risk assets.
With a lack of market-moving news and the absence of meaningful movement in the indexes, last week appeared quiet on the surface; however, underlying market action revealed the depth of demand for risk assets. From a microeconomic perspective, second-quarter earnings reports have generally been in line, with the usual amount of hits and misses. Thus far, our corporate credit analysts have not discerned any significant change to their sector outlooks. From a macroeconomic perspective, second-quarter real GDP was reported to have expanded an annualized 2.6%, and as widely expected by the market, the Federal Reserve did not make any change to monetary policy. The only change of note was that the Fed revised its language in the postmeeting statement regarding the timing of when it would begin to normalize its balance sheet. The language was changed to "relatively soon" from "this year." Assuming there aren't any significant negative catalysts until the next meeting in September, this language change is construed to mean that the Fed will begin to gradually reduce the amount of interest income and principal repayments it reinvests by $10 billion per month. Once the reduction program begins, the Fed will increase the amount of reduction by another $10 billion per month until it reaches a cap of $50 billion per month. The Fed will then let $50 billion per month roll off its balance sheet until it decides that it is no longer holding more securities than necessary to implement its monetary policy.
In the corporate bond market, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) continued its tightening trend but declined only 1 basis point to end the week at +106. In the high-yield market, the BofA Merrill Lynch High Yield Master Index tightened 5 bps to +359. In equities, the S&P 500 was unchanged and volatility sank to new lows.