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Credit Insights

Credit Spreads Weaken as Investors Weigh Losses Across Fixed-Income Classes

Retail sales strong enough to raise economic forecasts, but not high enough to prompt Fed to raise rates this month.

Trading action in the corporate bond markets was squishy last week. There were several short bouts of buying activity and decent liquidity in the secondary markets, only to quickly disappear and remain moribund for the remainder of the day. Investors were especially conscious of the all-in yields as buyers of corporate bonds emerged when underlying interest rates rose, yet these same buyers quickly disappeared when interest rates dropped. In addition, the ends of the yield curve traded well, but the middle of the curve struggled. Short-term bonds with maturities of 5 years and less were well bid and long-term bonds with maturities of 30 years were met with strong demand, but the intermediate part of the curve from 5 to 10 years struggled to find buyers. Over the course of the week, spreads were weaker more often than not, and the average spread of the Morningstar Corporate Bond Index widened 3 basis points to end the week at +143. In the high-yield space, the average spread of the Bank of America Merrill Lynch High Yield Index widened 7 basis points to +463. In conjunction with widening credit spreads, high-yield mutual funds and exchange-traded funds suffered their third-greatest weekly outflow over the past year.