Corporate Bond Market Wakes From Summer Slumber
Monetary policy expected to begin tightening at measured pace.
Following Labor Day, the corporate bond market woke from its typical summer slumber, when investors head to the beach instead of commuting to the trading desk. The new issue market sprang back to life as a multitude of issuers priced new transactions, which were generally well received in the marketplace, and trading volume in the secondary markets picked up. However, between the deluge of new supply, the potential economic impact of hurricanes Harvey and Irma, and expectations for impending changes in monetary policy, investors were unwilling to bid up prices for risk assets, preferring the safety of Treasury bonds.
The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) widened slightly last week to +115, and the average credit spread of the BofA Merrill Lynch High Yield Master Index widened 10 basis points to +392. Although corporate credit spreads have widened modestly from their recent lows at the end of July, they remain much tighter year to date. Since the end of last year, investment-grade corporate bond spreads have tightened 13 basis points and high-yield spreads have tightened 29 basis points.