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Credit Insights

Sovereign Bond Prices Continue to Climb Around the World

Looking at the impact of Europe's quantitative easing program on corporate bond markets.

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Prices of investment-grade corporate bonds rose last week as plunging Treasury yields pulled interest rates lower. However, the credit spread on investment-grade corporate bonds widened 2 basis points as the average spread in the Morningstar Corporate Bond Index widened to +148. With the report that real GDP growth slowed to 2.6% in the fourth quarter, the S&P 500 falling almost 2.8%, and volatility rising over the course of the week, buyers of investment-grade corporate bonds were unwilling to chase bond prices higher, thus pushing the credit spreads slightly wider. The Treasury yield curve declined almost 14 basis points across the long end of the curve as the 5-year ended the week at 1.19%, the 10-year at 1.68%, and the 30-year at 2.25%. These yields are near their lowest since April 2013, before former Fed Chairman Ben Bernanke began to intimate to the market that the Fed was nearing the time it would begin to taper the last round of quantitative easing.

While some investors flocked to the safety of Treasury bonds, other investors were enticed by the higher yield offered on below-investment-grade bonds. The average spread of the Bank of America Merrill Lynch High Yield Master Index tightened 4 basis points to +526. Weekly fund flows into high-yield mutual funds and exchange-traded funds of $2.7 billion were the second highest over the past year.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.