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Credit Insights

Corporate Bond Market Inured to Political Drama in Washington

The corporate bond market traded in an orderly fashion and was relatively quiet last week.

Whether investors have either disregarded or have just become so inured to all of the noise and headlines emanating out of Washington, the corporate bond market traded in an orderly fashion and was relatively quiet last week. There remained a bid for U.S. dollar-denominated corporate bonds; however, the sentiment across fixed-income traders weakened slightly, generally following the gyrations in the equity markets. The amount of new issues settled into a normal range for this time of year, although we expect the new issue market will be subdued over the next two weeks as companies begin to enter their quiet period before the quarterly earnings reports start in mid-October. On a relative basis, the investment grade market performed better to the downside than the high-yield market. For all of the news regarding impeachment investigations, on a week-over-week basis, the Morningstar Corporate Bond Index only widened 2 basis points to +119; whereas, in the high-yield market, the ICE BofAML High-Yield Master II Index widened 18 basis points to +399.

Typically, over the short term, the movement in the investment grade market is more closely correlated with movements in the U.S. Treasury bond market. Between the volatility in the stock market and the calls for impeachment, Treasuries prices rose as some investors decided to head for the sidelines. In the short end of the curve, the interest rate on the 2-year bond decreased 5 basis points to 1.63% and the 5-year fell 4 basis points to 1.56%. In the longer end of the curve, the yield on both the 10- and 30-year bonds declined by 4 basis points, to 1.68% and 2.12%, respectively. In the high yield market, over the short term, credit spreads are typically more correlated with movements in the equity markets and high yield spreads widened out in conjunction with the 1.01% decline in the S&P 500. 


  Source: Source: Morningstar, Inc., ICE BofAML Global Indexes. Data as of 9/27/2019

Typically, over the short term, the movement in the investment grade market is more closely correlated with movements in the U.S. Treasury bond market. Between the volatility in the stock market and the calls for impeachment, Treasuries prices rose as some investors decided to head for the sidelines. In the short end of the curve, the interest rate on the 2-year bond decreased 5 basis points to 1.63% and the 5-year fell 4 basis points to 1.56%. In the longer end of the curve, the yield on the 10- and 30-year bonds declined by 4 basis points, to 1.68% and 2.12%, respectively. In the high-yield market, over the short term, credit spreads are typically more correlated with movements in the equity markets and high-yield spreads widened out in conjunction with the 1.01% decline in the S&P 500.

Funding rates in the overnight repurchase (repo) markets normalized after the Federal Reserve stepped in and provided overnight and term-lending facilities. While these facilities were oversubscribed at the beginning of the week, funding levels continued to normalize and by the end of the week, although the facilities were still utilized, the amount requested fell below the size of the facilities. The key to determine whether this was just a blip in the technical of the repo market will occur after the quarter ends on Monday. Many banks will often increase the amount of cash they hold on their balance sheet at the end of the quarter to bolster their liquidity ratios. This is known as “window dressing”. If the amounts drawn on the facilities provided by the Fed decline and the yields decrease to normal levels, then the market will assume this issue was a one-time event. However, if after the quarter ends the amount drawn on the Fed’s facilities remains high and interest rates remain above normal, then the market will assume that whatever has caused this disruption is continuing.

Economic indicators released last week continue to indicate slow and steady economic growth in the U.S. over the near term. For example, the IHS Markit Flash U.S. Composite Purchasing Managers Index rose to 51.0 in September from 50.7 in August, only slightly below market consensus. Underlying the composite, the services business activity index rose to 50.9 from 50.7 and the manufacturing output index rose to 51.7 from 50.8. Levels above 50 indicate economic expansion whereas levels below 50 indicate economic contraction. According to the Bureau of Economic Analysis, the personal savings rate rose to 8.1% as the growth in personal income (0.4% monthly increase) increased faster than consumer spending (0.1% monthly increase). In addition, inflation is heading toward the Federal Reserve’s 2% target rate as the core Personal Consumption Expenditures (PCE) Index rose for the third month in a row to a 1.8% year-over-year increase. Headline durable goods orders for August rose 0.2% from July, well in excess of the street consensus for a (1.2%) contraction. The forecasts for third-quarter GDP from the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of New York converged at the end of the week. The GDPNow model estimate provided by the Federal Reserve Bank of Atlanta for real GDP growth in third-quarter 2019 rose to 2.1% from 1.9% the prior week; whereas, the Nowcast as calculated by the Federal Reserve Bank of New York for third-quarter GDP fell to 2.06% from 2.24% the prior week.

After four consecutive weeks of inflows, fund flows in the high-yield asset class retrenched as investors withdrew $0.3 billion of funds. Net unit creation among the high-yield exchange traded funds (ETFs) was essentially flat last week compared with $2.1 billion the prior week. Asset flows among the ETFs is typically considered a proxy for institutional and hot-money investors. Among the open-end high-yield mutual funds, fund flows turned negative as investors redeemed $0.3 billion last week compared with an inflow of $1.1 billion the prior week. Historically, flows among the open-end funds have been attributed to individual investor demand. Year to date, there have been a total of $19.2 billion of net inflows into the high-yield asset class. Most of the inflows have been driven by $13.7 billion of net unit creation across the high-yield ETFs as the open-end funds have only received $5.5 billion of new investments.

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