Corporate Credit Spreads Unchanged
The corporate bond market couldn't maintain momentum in the face of interest-rate increases and new issue supply.
The corporate bond market tried to rebound two weeks ago but was unable to maintain positive momentum in the face of the persistent increase in interest rates and robust new issue supply. The average credit spread of the Morningstar Corporate Bond Index ended the week at +113, unchanged from the prior week. In the high-yield market, the average spread of the BofA Merrill Lynch High Yield Master Index widened only 1 basis point to +341. While institutional investors have continued to put money to work in the corporate bond market, the amount of new supply brought to market has been enough to satiate this demand. Although economic conditions remain steady, which typically provides a tailwind for corporate bond credit spreads, investors have been unwilling to pay up for corporate bonds in the face of rising interest rates.
Rising interest rates have pushed prices down on fixed-income securities thus far this year, and all of Morningstar's main fixed-income indexes are in the red. For example, through May 18, the Morningstar US Core Bond Index (our broadest measure of the fixed-income universe) has fallen 2.78% and the Morningstar US Government Bond Index has declined 2.50%. In the investment-grade corporate bond market, returns have been further pressured as corporate credit spreads have widened 17 basis points since the end of last year, resulting in a decline of 3.75% in the Morningstar Corporate Bond Index. However, with its shorter durations and greater sensitivity to economic conditions, the high-yield market has outperformed other fixed-income indexes to the downside as the BofA Merrill Lynch High Yield Master Index has fallen only 0.25%. Among other assets, the equity market pulled back slightly last week as the S&P 500 declined 0.54% but for the year has risen 1.47%.