Credit Insights

Stocks Regain Lost Ground, but Corporate Bond Market Fails to Follow

Dave Sekera, CFA

Last week, the markets were mainly focused on commentary from Federal Reserve Chairman Jerome Powell and the public back and forth between the Trump administration and the Chinese government. The stock market soared higher midweek following Powell's intimation that the federal-funds rate is closing in on what the Fed considers to be a neutral rate. The neutral rate is the theoretical interest rate at which short-term rates are neither stimulative nor restrictive to future economic growth and inflation. Later in the week, the positive momentum continued to propel the stock market higher as investors became more confident that the United States and China will be able to negotiate reasonable trade terms and tariffs, despite the ongoing posturing. The preponderance of the stock market's gains occurred Wednesday following Powell's public commentary, leading the market to a 4.85% increase over the course of the week.

While the equity markets rose, the corporate bond market continued to operate in a risk-off mode. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade market) widened 6 basis points to end the week at +143. In the high-yield market, the BofA Merrill Lynch High Yield Master Index ended the week unchanged at +429. While the equity market has generated gains thus far this year, the average spread of the investment-grade index has widened 47 basis points and the credit spread of the high-yield index has risen 66 basis points year to date. The decline in oil prices has weighed heavily on the energy sector, whose bond prices have plunged lower across the board and have had an outsize impact on the overall corporate bond indexes.