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Credit Insights

Third-Quarter Fixed-Income Market Review

Corporate credit spreads continued to tighten last week and are advancing toward multiyear lows.

Corporate credit spreads continued to tighten last week and are advancing toward multiyear lows. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) tightened 4 basis points to +104 last week, and the average credit spread of the BofA Merrill Lynch High Yield Master Index tightened 8 basis points to +356. Over the past few years, the tightest those spreads have registered was in mid-2014, when they reached +101 and +335, respectively. Before then, credit spreads have only ever been tighter in the runup to the 2008-09 credit crisis.

Investor demand for corporate bonds has been supported by solid fundamentals underlying corporate credit risk. Healthy earnings have led to improving credit metrics, and the number of actions companies have undertaken to return capital to shareholders at the expense of bondholders has remained low. However, the new issue market was relatively lackluster last week and there were not enough new issues to sate investor demand. Instead, investors turned to the secondary market to put cash to work. Trading volume in the secondary market surged and credit spreads tightened as investors bid up the price of bonds.

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