Credit Insights

Corporate Bond Investors Requiring Wider Spreads to Compensate for Rising Volatility

Dave Sekera, CFA

Investors went for a wild ride on the stock market roller coaster last week. The number of daily swings in the equity indexes this past week has been rarely seen since the global financial crisis 10 years ago. After several days of plus or minus 2% swings, the S&P 500 ended the week on a weak note as slower-than-expected growth punished many of the previously high-flying stocks such as Amazon.com (A, stable) and Alphabet (AA, stable) and the contagion from these declines spread across the technology sector. The S&P 500 fell almost 4% last week and is now down 0.5% for the year and almost 10% from its peak in September; however, in the larger context, considering how much the equity market ramped up during 2017, it is still up almost 19% since the end of 2016.

Although third-quarter reported earnings growth has been robust and economic growth remains relatively strong, credit spreads in the corporate bond market have widened as investors are requiring greater compensation to make up for the increase in volatility and broader decline in risk assets. In the corporate bond market, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade market) widened 6 basis points to +121 last week. In the high-yield market, the BofA Merrill Lynch High Yield Master Index widened 34 basis points to +385. Between the heightened volatility in the markets and investors concentrating on digesting third-quarter earnings reports, the new issue market for corporate bonds was especially quiet as issuers decided to wait for calmer waters before coming to the capital markets.

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