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Credit Insights

Activity Slows as Holidays Approach

Last week, a few stragglers tapped the markets, but the pace of activity in the new issue market has slowed considerably and trading volume dwindled in the secondary markets.

Three weeks ago, we noted that some investors were locking in profits early for the year and other investors had already begun their year-end window-dressing. Two weeks ago, there was a brief bout of new issue activity as issuers looked to lock in long-term financing before the holiday season. Last week, a few stragglers tapped the markets, but the pace of activity in the new issue market has slowed considerably and trading volume dwindled in the secondary markets. Volatility has also been muted, and corporate credit spreads traded in a narrow range. While there may be a few new issues priced early this week before the Federal Open Market Committee meeting and a few portfolio managers may have some last-minute adjustments to make, trading activity and new issue volume should be light for the remainder of year. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) tightened 1 basis point to +100, while the BofA Merrill Lynch High Yield Master Index ended the week unchanged at +363.

Interest rates widened slightly this past week, but the shape of the yield curve held relatively steady as the spread between the 2-year and 10-year Treasury bonds was unchanged. Although the shape of the curve was unmoved this past week, the yield curve has been on a flattening trend since the Federal Reserve began to raise short-term rates in its pursuit of normalizing monetary policy. Currently, the yield curve is at its flattest level since before the global financial crisis. This flattening trend may continue as it has been influenced by global central bank activities. For example, the Fed has been raising short-term interest rates and is expected to raise the federal funds rate again this week. Short-term rates are expected to rise even further next year. According to CME Group's FedWatch Tool, the market is pricing in a 59% probability that the Fed will raise short-term rates to above 1.75% by the end of 2018.

Although short-term rates have been rising, demand for long-term bonds has kept prices steady. The long end of the curve may be influenced by the ongoing quantitative easing programs of the European Central Bank and Bank of Japan. This demand will continue to be affected by global central bank activity as the ECB will not begin to taper its asset-purchase program until next year. Even then, the ECB will continue to continue to purchase EUR 30 billion per month until September 2018, which will infuse the eurozone with an additional EUR 270 billion of new money.

High-Yield Inflows Retain Momentum
Investors continued to return to the high-yield asset class last week. High-yield open-end funds and exchange-traded funds registered $1.0 billion of inflows last week, consisting of $0.6 billion of deposits into open-end funds and $0.4 billion of net unit creation among ETFs. Year to date, the high-yield asset class has suffered total redemptions of $10.6 billion, consisting of $14.8 billion of redemptions in the open-end mutual funds offset by $4.2 billion of new unit creation in ETFs.

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