Corporate Credit Spreads Trading in Tightest Decile of Historical Range
Highest weekly high-yield fund inflows over past year and fourth highest over past two years.
Although Treasury bond prices fell last week on reports that China's foreign-exchange officials recommended the country suspend its purchases of U.S. government bonds, risk assets continued to march higher across the board. The S&P 500 rose 1.6% and is already up 4.2% thus far this year, while oil surged to over $64 per barrel, its highest price since December 2014. In the corporate bond market, credit spreads tightened to levels not seen since before the global financial credit crisis as the sentiment for risk assets outweighed the sell-off in the Treasury bond market. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) tightened 4 basis points and ended the week at +92, its tightest credit spread level since June 2007. After tightening 22 basis points the prior week, the average spread of the BofA Merrill Lynch High Yield Master Index widened 1 basis point to end the week at +337. Considering that the high-yield market is trading at its tightest spread levels since mid-2014, this widening is indicative of a consolidating market as opposed to weakness. The high-yield index has only ever registered tighter credit spread levels before the global financial credit crisis.