Corporate Credit Spreads Tighten After New Issuance Slows
The U.S. announced it would delay the imposition of new tariffs on $250 billion worth of Chinese imports for two weeks.
The two most market-moving items in the headlines last week were goodwill gestures from the Chinese and U.S. administrations and the European Central Bank's announcement that it was ramping up its already extraordinarily loose monetary policy. In order to stimulate moribund economic activity in the European Union, the ECB announced it would lower its key short-term lending rate to negative 0.50% from negative 0.40% and would restart its bond-buying program at a rate of EUR 20 billion per month. The bond-buying program is scheduled to begin in November, just under one year from when it was discontinued last December. In regard to the ongoing trade tensions between the U.S. and China, the markets received a jolt of optimism as each side announced concessions. Among the goodwill gestures, the U.S. announced it would delay the imposition of new tariffs on $250 billion worth of Chinese imports for two weeks, and China announced it would waive tariffs on some U.S. farm products including soybeans and pork. U.S. and Chinese officials are scheduled to resume trade negotiations at the beginning of October.
In the U.S. corporate bond market, the amount of new-issue volume decreased last week compared with the frantic, record-breaking pace of the prior week. The amount of new issuance continued to run at a brisk pace, but based on the high demand among global institutional investors for U.S. corporate bonds, the new supply was easily digested by the market. Between the lower supply of new issues and positive news headlines, corporate credit spreads tightened across both the investment-grade and high-yield markets. In the investment-grade market, on a week-over-week basis, the Morningstar Corporate Bond Index tightened 5 basis points to +118 and in the high-yield market, the ICE BofAML High Yield Master II Index tightened 22 basis points to +383.