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Credit Insights

Volatility Returns With a Vengeance

High-yield investors head for the exit.

After trading within a relatively narrow band for much of the year, market volatility has returned with a vengeance. Following the Federal Open Market Committee meeting at the end of July, as measured by the CBOE Volatility Index, the volatility of the S&P 500 surged from near 52-week lows to its highest level year to date last Monday, before settling down somewhat by the end of the week.

As expected, the Federal Reserve cut the federal-funds rate by 25 basis points to 2.00%-2.25%; however, in a rare display of contention on the Federal Open Market Committee, two voting members (presidents of the Boston and Kansas City Federal Reserve Banks) dissented from this action. These dissents called into doubt the assumption of additional near-term easing, and many traders feared that the Fed might be one-and-done for the foreseeable future. Without the prospect of additional near-term monetary easing, many traders decided to sell and lock in some of the gains they have made thus far this year. Compounding investors' concerns that the Fed might not be in any hurry to lower interest rates further, President Donald Trump announced his intention to impose 10% tariffs on $300 billion worth of imports from China. After a brief cease-fire, the resumption and expansion of the trade war renewed fears that the United States will not be able to stave off contagion from the global economic malaise that has been spreading in Europe and Asia.