Corporate Bond Market Takes a Breather Before Earnings Season Turns to Full Throttle
Return of the megamergers.
From a trading point of view, last week was relatively uneventful. The average spread of the Morningstar Corporate Bond Index widened 1 basis point to +177 bps over Treasuries. After tightening an astounding 70 basis points the prior week, the Bank of America Merrill Lynch High Yield Master Index took a breather and widened a modest 5 basis points to end the week at +618. Investors were comforted by the stabilization and subsequent rebound in commodity prices and attracted to the wide credit spreads caused by the weakness over the past few months; however, they were unwilling to push credit spreads tighter in the face of third-quarter earnings reports, which begin in earnest this week. The bad-news-is-good-news meme prevailed in the equity market, as stocks rose about 1%, but the sentiment did not carry over into the corporate bond market. Weak economic metrics are being construed by some investors as weak enough to force central banks to keep the liquidity spigot open, but yet not so weak as to impair earnings growth. Since the September Federal Open Market Committee meeting, the market continues to price in a higher probability that the Fed won't begin to raise the federal funds rate until well into 2016. Considering that the FOMC does not have a press conference scheduled for the January meeting, if it does not raise rates in December then the next most likely action would not be until March. In addition, reports are becoming even more pervasive that both the European Central Bank and Bank of Japan are evaluating increases to their respective ongoing quantitative easing programs.
The wider credit spreads afforded by the high-yield market continued to attract investors as weekly high-yield fund flows again rose over $1 billion. After suffering outflows for much of the year, this is the first time since January that the asset class has registered two consecutive weeks of over $1 billion in inflows. Inflows into high-yield exchange-traded funds subsided slightly last week, but the slight reduction in ETF inflows was made up by open-end mutual funds, which saw their first weekly gain over the past month. Between ETFs and open-end mutual funds, the combined amount of inflows into the high-yield sector was $1.4 billion last week.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.