After relatively smooth sailing over the past three months, the corporate bond market encountered some choppy water at the end of last week. Corporate credit spreads tightened early in the week but, according to one Wall Street bond trader, ran into rough seas in the latter half of the week in sympathy with the decline in the equity market. After its seemingly relentless rise thus far this year, the stock market finally gave back some of its gains as the S&P 500 declined 3.16% last week, with the preponderance of the loss occurring at the end of the week. Even after this pullback, the equity index remains up 4.06% year to date.
Earlier in the week, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) declined 3 basis points to +88 basis points (its lowest level since before the global financial credit crisis) and held that level by the skin of its teeth through the end of Friday. The average credit spread of the investment-grade index is now 8 basis points tighter year to date and 40 basis points tighter than at the end of 2016. As a point of reference, the tightest the investment-grade index has ever registered was +80 basis points in February 2007. In the high-yield market, the BofA Merrill Lynch High Yield Master Index widened 13 basis points to end the week at +336. The high-yield index remains 27 basis points tighter year to date, which is 85 basis points tighter than at the end of 2016. The tightest the high-yield index has ever registered was +241 basis points in June 2007.