Investor Demand Pushes Credit Spreads Tighter
Monetary easing will heighten demand for corporate bonds.
The corporate bond market performed well last week. The average spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade market, tightened 12 basis points to +160 bps over Treasuries. In the high-yield market, the average credit spread in the Bank of America Merrill Lynch High Yield Master Index tightened 9 basis points to end the week at +588. Demand from foreign investors helped drive the market tighter as investors in Europe and Asia sought the higher all-in yields that the U.S. fixed-income market provides. Foreign investors also looked to U.S. dollar-denominated investments to protect the purchasing power of their savings as the dollar has been steadily appreciating versus other currencies. Typically, in a strong corporate bond market, high yield will outperform investment grade to the upside; however, the investment-grade bond market outperformed the high-yield market last week. Investors looked to investment-grade bonds as substitutes for sovereign bonds, whereas weak economic metrics in the United States limited credit spread tightening among high-yield bonds, which are more correlated with economic activity.
At a reported growth rate of 1.5%, third-quarter U.S. gross domestic product grew much more slowly than expected. The fourth quarter thus far appears to be showing this same pace of lackluster growth. Several recent economic metrics are indicating that the weak growth rate from the third quarter is carrying into the fourth quarter. For example, the report for durable goods orders excluding transportation fell 0.4% last month and core durable goods orders fell 0.3%. Consumer spending, which accounts for a significant proportion of economic activity, slowed to a 0.1% increase and personal income rose only 0.1%.