Corporate Credit Spreads Tighten as Risk Assets Back in Favor
Monetary policy expected to begin tightening at measured pace.
Risk assets were back in favor last week as corporate credit spreads tightened, stocks rose to new highs, and safe-haven Treasury bonds sold off. Volatility was elevated in the prior few weeks, but the VIX Index has dwindled to 10.2 as hurricanes Harvey and Irma caused only short-term market dislocations and investors have become inured to North Korean rocket launches (12 so far this year) and habituated to minor terrorist attacks in Europe. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) tightened 4 basis points to +111 last week and the average credit spread of the BofA Merrill Lynch High Yield Master Index tightened 19 basis points to +373.