Rising interest rates, tightening monetary policy, and contagion from heightened Italian sovereign risk took their toll on the U.S. equity market last week. The S&P 500 fell as much as 5.45% by the close Thursday before rallying Friday, ending the week with a 4.10% loss compared with the prior week. Since its recent high reached Sept. 20, the index has dropped 6.90%. While this pullback has been swift, in a longer-term context, the retreat only brings the index back to the same level it was in July. It still registers a gain of 3.50% for the year.
While demand for corporate bonds provided support to hold credit spreads steady at the end of September and beginning of October, investors in the corporate bond market succumbed to the risk-off sentiment permeating global equity markets. As such, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade market) widened 4 basis points to +113 last week. In the high-yield market, the BofA Merrill Lynch High Yield Master Index widened 22 basis points to +354. The investment-grade and high-yield indexes are currently at their average spread levels for the year to date.