Corporate credit spreads continued to widen last week as the increasing hazard from global trade wars, with their corresponding import tariffs and retaliatory tariffs, took its toll on investor psyche across all risk assets. In addition, renewed expectations that large-scale mergers and acquisitions may be on the horizon further pressured the investment-grade market. The average spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade bond market, widened 6 basis points last week to +126. In the high-yield market, the BofA Merrill Lynch High Yield Master Index similarly widened 6 basis points to +339.
Typically, high-yield credit spreads are more volatile than investment-grade because of their greater credit risk and elevated probability of default; however, the high-yield market has significantly outperformed the investment-grade market so far this year, as the underlying companies in the high-yield universe are more correlated to economic activity, which has been robust this quarter. Year to date, credit spreads in the investment-grade market have widened 30 basis points, whereas in the high-yield market, spreads have tightened 24 basis points. At its current level, the average credit spread in the investment-grade market is at its widest level this year and is as high as it was since February 2017. In contrast, the average credit spread of the high-yield index remains near its tightest levels since before the 2008-09 credit crisis. Since the beginning of 2000, the high-yield index has only ever traded below the current level less than 10% of the time.
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David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.