High-Yield Credit Spreads Snap Tighter
Investors tiptoe back into high yield.
Corporate credit spreads in the high-yield market tightened 23 basis points last week as the average spread of the BofA Merrill Lynch High Yield Master Index dropped to +338 basis points. This is near the low end of the 90-basis-point range that the high-yield market has traded in since the beginning of 2017. In the investment-grade market, the average spread of the Morningstar Corporate Bond Index tightened 3 basis points last week to +109. While credit spreads in the high-yield market are nearing the lows they hit in January, credit spreads in the investment-grade market remain well wide of the levels they hit earlier this year.
Yields on U.S. Treasuries marched higher last week, with short-term interest rates hitting renewed highs. Interest rates have been pushed and pulled in different directions over the past few weeks. Short-term rates have surged higher in conjunction with mounting inflation pressures, while trading levels on long-term interest rates have vacillated depending on the volatility amid risk-on and risk-off sentiments as geopolitical risks ebb and flow. This past week, the Bureau of Labor Statistics released its March report on the Consumer Price Index, which showed that headline inflation rose to a 2.4% annual rate on a year-over-year basis. Even excluding the more volatile components of the index, core CPI inflation increased to 2.1% in March, an increase from 1.8% last month and the highest reading over the past 13 months. With inflation running at the Federal Reserve's preferred rate, investors are pricing in another 25-basis-point hike in the federal-funds rate, to 175-200 basis points, as a near certainty. In addition, investors are bracing for further rate hikes this fall. According to the CME FedWatch Tool, the interest-rate futures market is pricing in an 84% probability that the fed-funds rate will end the year over 200 basis points.