Credit Insights

Corporate Bonds Weaken on Concerns That Trade War May Expand to New Fronts

Dave Sekera, CFA

Slowing economic growth and the potential expansion of the trade war to a second front were more than enough to convince investors to sell risk assets and head to the safety of U.S. Treasury bonds. While most economic metrics continue to indicate that the economy is expanding, recently released economic indicators such as Markit's Composite Purchasing Managers Index have been dropping. While a level above 50 does indicate economic growth, the PMI reading for May dropped to 50.9 (a 36-month low) from 53.0 last month. The deceleration appears to be widespread as both the services and manufacturing components fell. According the Federal Reserve Bank of Atlanta's GDPNow model estimate for real GDP growth, the seasonally adjusted annual rate for GDP growth in the second quarter is currently only 1.2%. The GDPNow model estimate had been as high as 1.7% at the beginning of May.

While U.S. economic growth appears to be slowing, there are also indications that the economy in China may not be as stable as believed. For example, reported loan losses in China continue to be very low, but for the first time in over 20 years, the government took control of a failing regional Chinese bank. After this bank was placed into receivership, short-term funding costs for other regional Chinese banks rose across the country as regional banks reassessed the Chinese government's willingness to continue to backstop individual banks.