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Credit Insights

Corporate Bond Market Steadies After Italian Political Turmoil Subsides

Global asset markets had a wild ride at the beginning of last week as political turmoil roiled Italy's sovereign bond market.

Global asset markets had a wild ride at the beginning of last week as political turmoil roiled Italy's sovereign bond market. After Italy's president rejected the formation of a new government by the recently elected prime minister, the country's sovereign bonds plummeted, sending their yields soaring. At the short end of the curve, the yield on the Italian 2-year bond surged from 0.25% to peak at 2.50% midweek. Along the longer end of the curve, the interest rate on the 10-year bond rose from 2.40% to 3.10%. This represented the greatest weekly volatility since the onset of the European debt crisis in 2011. As Italian bonds sank, many investors across the globe had flashbacks to the 2011-12 European sovereign debt and banking crisis, which led them to sell risky assets first and ask questions later.

Contagion from the selling wave spread to the U.S. asset markets, where credit spreads on investment-grade corporate bonds widened as much as 5 basis points, high-yield spreads widened as much as 22 basis points, and the S&P 500 fell as much as 1.15%. However, by the latter half of the week, markets began to calm as the Italian prime minister was able to form a government that was approved by the president. As the political turmoil dwindled, asset markets quickly ramped up and regained much of the lost ground. In the United States, strong economic indicators fueled a strong rally Friday, and most assets in the U.S. ended the week near where they started. The average credit spread of the Morningstar Corporate Bond Index ended the week at +199, 4 basis points wider from the prior week. In the high-yield market, the average spread of the BofA Merrill Lynch High Yield Master Index ended the week at +355, only 2 basis points wider. In the equity market, the S&P 500 ended the week unchanged.

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