Commodity Price Declines Indicate Global Economic Deceleration; Credit Spreads Widen Further
GDP not as low as it looked; Fed commentary specifically noncommittal.
With weakness in the global commodity markets, wild fluctuations in the Chinese stock market, and heightened idiosyncratic risk among domestic issuers, credit spreads in the corporate bond markets widened further last week. In the investment-grade space, the average spread of the Morningstar Corporate Bond Index widened 3 basis points last week to +159, its widest level over the past two years. In the high-yield space, the average spread of the Bank of America Merrill Lynch High Yield Index widened 4 basis points to +536. While the high-yield index is slightly tighter than its widest point reached in December last year, it is near its widest levels over the past two years.
Commodity prices have slumped over the past few months and picked up speed to the downside this past month. Softening global economic growth, especially in China, has reduced demand for industrial raw materials. From iron ore to coal, prices for basic material commodities have fallen precipitously. In fact, the price of copper (which has one of the highest historical correlations to economic activity) has fallen to its lowest levels since mid-2009. As these commodity prices have fallen, the average credit spread in the basic materials sector of the Morningstar Corporate Bond Index has increased almost 40 basis points since the end of last year to approximately +230 basis points over Treasuries. Of this widening, 30 basis points has occurred in July alone. This is the widest level this sector has registered since mid-2013. The basic materials sector constitutes 5.5% of our index and is responsible for much of the widening of the overall investment-grade market.