High-Yield Bonds Rally as Spreads Near Multiyear Highs
The U.S. Treasury market gave back the price gains it made the prior week.
While last week ended on a sour note after Apple (AA-, negative) reported weaker-than-expected earnings, the S&P 500 had surged higher before that and, even after accounting for the pullback Friday, rose 2.42% for the week. While there were some disappointments in the technology sector as a few highfliers failed to meet the Street's lofty growth expectations, reported earnings growth has generally been robust, and economic growth remains relatively strong.
In the corporate bond market, investment-grade bonds were unable to participate in the rally; investors were unwilling to pay up for investment-grade corporate bonds as Treasury prices were plunging. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade market) widened 1 basis point and ended the week at +122. However, in the junk bond market, with its wider credit spreads (closing in on two-year highs) and shorter durations, the risk-on atmosphere created by rising stock prices led investors to bid up prices and push spreads tighter. The BofA Merrill Lynch High Yield Master Index tightened 13 basis points to end the week at +372. As the equity market rebounded, the risk-on atmosphere reopened the window to the new issue market and corporate bond issuers returned to the market place. Now that most companies have reported third-quarter results and the holidays will arrive sooner rather than later, we expect that the next few weeks will be busy in the new issue market as CFOs look to complete their capital market activities before the new issue window closes toward the end of the year.