Contagion From Equity Market Volatility Spreads to Corporate Bond Market
The spike in volatility last week drove a "risk off" sentiment among investors, which sent prices of risky assets down across the board.
Two weeks ago, we noted that the corporate bond market had sailed into increasingly choppy waters as contagion from the spike in equity volatility spread into other asset classes. Last week, the turbulence increased as equity market volatility continued to swing wildly and decimated exchange-traded funds that were created to short volatility. The spike in volatility drove a "risk off" sentiment among investors, which sent prices of risky assets down across the board.
The equity market took the brunt of the selling, sending the S&P 500 down 5.84% last week; this put the equity market into negative territory for the year. In the corporate bond market, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) widened 9 basis points to +97 basis points. In the high-yield market, the BofA Merrill Lynch High Yield Master Index widened 46 basis points to end the week at +382. Excluding the abnormal market action during the 2008-09 global financial credit crisis, this is one of the largest weekly swings in the high-yield index of the past 20 years.