While prices in most other asset classes rose last week, corporate credit spreads in the investment-grade market were unchanged. In the high-yield market, credit spreads widened modestly. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) ended the week where it began at +101. In the high-yield market, the average credit spread of the BofA Merrill Lynch High Yield Master Index widened 8 basis points to +360. After seeing the lowest credit spread levels since before the 2008-09 credit crisis, it appears that many investors are unwilling to drive credit spreads even tighter.
Although corporate credit spreads were generally unchanged to slightly wider, interest rates on U.S. Treasury bonds declined. The yield curve continued to flatten as long-term interest rates declined faster than short-term rates. This past week, the 2-year Treasury note declined only 1 basis point, whereas the 10-year and 30-year bonds declined 9 and 8 basis points, respectively. With the market pricing in a high probability of another hike this year in the federal funds rate, the interest rate on the 2-year Treasury is at its highest level since the Federal Reserve was in the midst of slashing interest rates during the credit crisis. Currently, according to CME Group, the probability of a rate hike in December is 83%. While slightly lower than a week ago, this still represents a substantial increase from the 58% probability priced into the market in mid-September and the 32% probability at the beginning of September. As of the close Friday, the spread between the 2-year and 10-year Treasury was 78 basis points, matching the flattest level the yield curve has traded at since October 2007.
Although much has been written about the separatist movement in Catalonia threatening to declare independence from Spain, there has not been any meaningful impact in the fixed-income markets. The yield on Spain's 10-year sovereign bond ended the week at 1.61%, only 121 basis points higher than Germany's 10-year bond (the sovereign benchmark in Europe). In the European corporate bond market, the average credit spread of the Morningstar Eurobond Corporate Index tightened 1 basis point last week to +88, only a few basis points higher than the tightest level it reached earlier this past summer. Volatility remained low across the globe. In the United States, the VIX Index closed at 9.6 at the end of the week, only slightly higher than its historically lowest levels.
High-Yield Fund Flows
For the week ended Oct. 11, high-yield exchange-traded funds and open-end mutual funds experienced a net inflow of $0.8 billion. The inflows consisted of $0.8 billion of inflows into high-yield ETFs, while the fund flows in the open-end mutual funds were unchanged.
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