A Lot of Noise, but Little Impact on Corporate Credit Spreads
Trading volume in the corporate bond markets remained muted.
All the political commotion in Washington had little impact on credit spread trading levels in the corporate bond markets last week. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) widened only 1 basis point to +118. In the high-yield market, the Bank of America Merrill Lynch High Yield Master Index widened slightly in sympathy with the sell-off in the equity markets midweek but quickly rebounded. By the end of Friday, the average spread of the high-yield index was only 1 basis point wider, closing at +378. Among the underlying sectors in the high-yield space, energy performed relatively well, tightening 6 basis points. The outperformance of the energy sector was driven by the price of oil, which rose $2.60 to about $50.50 a barrel, back to the middle of its trading range over the past six months. In the equity market, after being down as much as 1.42% midweek, the S&P 500 recovered most of its losses and ended the week down only 0.38%. The greatest movement over the course of the week was in the Treasury bond market. Investors sought a safe haven in the Treasury market, bidding up prices and sending yields lower. Interest rates on 5-year, 10-year, and 30-year bonds dropped 7-10 basis points, bringing yields down to 1.78%, 2.23%, and 2.90%, respectively.
In another indication that portfolio managers and investors were not overly concerned about the political turmoil, trading volume in the corporate bond markets remained muted. One corporate bond trader said that among the activity he saw, there was very little derisking that occurred and the continuous demand for U.S. dollar-denominated corporate debt quickly snapped up those bonds that were offered for sale. He also noted that significant demand remains for high-quality dollar-denominated corporate bonds by European and Japanese buyers.
European and Japanese investors have had a consistent bid for investment-grade dollar-denominated corporate bonds for several years. A significant amount of this demand has been driven by the ongoing asset-purchase programs by the Bank of Japan and European Central Bank as part of their quantitative easing programs. As those central banks purchase fixed-income securities and take those bonds out of circulation, it reduces the amount of fixed-income securities available for investors yet also creates new money that those investors then look to reinvest in the fixed-income market. Investors in those two regions continue to see significant value in the higher absolute yields on dollar-denominated corporate bonds as opposed to euro- or yen-denominated bonds, which offer paltry and in some cases negative yields.
Although the movement in credit spreads was relatively muted last week, the renewed volatility was enough to keep issuers from tapping the U.S. public debt capital markets. Among the companies we rate, $12.5 billion worth of foreign-denominated new corporate bond issues was priced by eight issuers. The largest issues were from Apple (rating: AA-, negative), which sold EUR 2.5 billion worth of bonds, Anheuser-Busch InBev (rating, BBB+, stable), which issued GBP 2.25 billion, IBM (rating: A+, negative), which sold EUR 2 billion, and AT&T (rating: BBB/UR-), which brought CAD 1.35 billion to market. The remaining foreign-denominated transactions were Mylan (rating: BBB-, stable), United Parcel Service (rating: A+, stable), Verizon (rating: BBB, stable), and Wells Fargo (rating: A, negative). The new issue market is likely to return to life early this week as issuers look to lock in financing before the Memorial Day weekend, which often acts as the unofficial start to the summer slowdown.
Reversing some of the prior week's outflows, high-yield exchange-traded funds recorded an inflow of $0.7 billion, partially offset by $0.1 billion of redemptions among high-yield open-end funds, resulting in a net inflow of $0.6 billion to the high-yield sector. Year to date, fund flows in high yield have not been able to rebound to break-even and have registered a total outflow of $5.9 billion. However, over the past 52 weeks, the total amount of net inflows is $4.6 billion.
Morningstar Credit Ratings, LLC is a credit rating agency registered with the Securities and Exchange Commission as a nationally recognized statistical rating organization ("NRSRO"). Under its NRSRO registration, Morningstar Credit Ratings issues credit ratings on financial institutions (e.g., banks), corporate issuers, and asset-backed securities. While Morningstar Credit Ratings issues credit ratings on insurance companies, those ratings are not issued under its NRSRO registration. All Morningstar credit ratings and related analysis contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Morningstar credit ratings and related analysis should not be considered without an understanding and review of our methodologies, disclaimers, disclosures, and other important information found at https://ratingagency.morningstar.com.