Unusual Activity in 10-Year Treasury Hits Markets
Only best-known issuers with strong balance sheets dared tap the new issue market.
The corporate credit market suffered another week of widening spreads as investors fretted that global economic growth is slowing and that developed markets' central banks have exhausted their ammunition. In the investment-grade sector, the Morningstar Corporate Bond widened out 6 basis points and ended the week at +162. In the high-yield sector, the average spread in the Bank of America Merrill Lynch High Yield Master II Index had widened as much as 40 basis points by midweek, but recovered almost all of its widening on Thursday and Friday and ended the week at +468, only 2 basis points wider than the prior week. Through the week ended Wednesday, high-yield funds and exchange-traded funds experienced an outflow of $0.7 billion.
Wednesday was the worst day of the week, with traders hiding under their desks to keep from being hit by falling bids. It was not uncommon to see throwaway bids that were 10 basis points below pricing levels being hit. It seems that the market action was at least partially instigated by unusual market movement in the 10-year Treasury bond. As the bond market opened early in the morning, the yield on the 10-year began to steadily decline to a little over 2% from 2.15% as investors bid up the price of bonds as they looked to the safety of Treasuries. However, once the equity market opened, the yield on the 10-year immediately began to gap downward to as low as 1.87% within minutes.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.