New Issuance From Banking Sector Floods Corporate Bond Market

Fixed-income markets were largely unaffected by the looming government shutdown, as investors have become inured to the prospect of as well as the actual shutdowns over the years. While it was a holiday-shortened week, the new issue market was open for business, and following recent earnings reports, the banking sector flooded the market with new issues. Many of the large global banks reported earnings at the end of the prior week or early this past week and wasted no time issuing bonds after their quiet periods ended. While many financial companies reported lower-than-expected earnings or in some cases losses, underlying performance was generally within expectations, with their bottom lines constrained by one-time tax expense charges in conjunction with the recently enacted Tax Cuts and Jobs Act. The charges were attributed to a combination of writing down the value of deferred tax assets accumulated during the financial crisis of 2008-09 as well as repatriating accumulated earnings of non-U.S. subsidiaries. The who's who in the banking sector that took advantage of the opening to the new issue market included Bank of America (BAC) (BBB+, stable), Citigroup (C) (A-, stable), Goldman Sachs (GS) (BBB+, stable), JPMorgan Chase (JPM) (A, stable), Morgan Stanley (MS) (BBB+, stable), PNC Financial Services (PNC) (A- stable), U.S. Bancorp (USB) (AA-, stable), and Wells Fargo (WFC) (A, stable).

Credit spreads in the investment-grade market remained relatively steady as strong demand for corporate bonds was able to mostly absorb the deluge of new issuance. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) widened just 1 basis point and ended the week at +93, near its lowest levels since before the global financial credit crisis. As for the underlying components of the index, the average spread of the financial sector widened 1 basis point, whereas the average spread of the industrial sector was unchanged and the utility sector widened 1 basis point. Year to date, the average credit spread of the overall index has tightened 3 basis points, driven by a 4-basis-point tightening in the industrial sector and 7-basis-point tightening in the utility sector. Financial sector credit spreads have been flat.

In the high-yield market, the BofA Merrill Lynch High Yield Master Index tightened 2 basis points to end the week at +335, which is 28 basis points tighter than at the end of 2017. This is the tightest level the high-yield index has registered since mid-2014 and only 2 basis points away from its tightest level since before the global financial credit crisis. Among other risk assets, the S&P 500 rose almost 1% last week and is already up 5.1% over the past 13 trading days thus far this year. After rallying almost as much as $9 this year, oil prices pulled back slightly and ended the week $1 lower at $63.50 per barrel.

The Treasury market got whacked again last week as prices fell across the entire yield curve, sending interest rates to their highest levels in years. The yields on the 2-, 5-, 10-, and 30-year Treasury bonds rose 6, 10, 11, and 8 basis points, respectively, to 2.06%, 2.45%, 2.66%, and 2.93%. The yield on the 2-year Treasury bond is highest since the midst of the global financial credit crisis, and the yield on the 5-year Treasury bond is its highest since 2010. The yield on the 10-year Treasury bond is its highest since the fall of 2014.

Third-Highest Weekly High-Yield Fund Outflow of Past Year
Follows Highest Weekly Inflow
Fund flows in the high-yield market quickly reversed last week, as the $3.5 billion of outflows is the third-highest weekly outflow registered over the past year. Fund flows consisted of $1.1 billion of withdrawals among the open-end funds and $2.4 billion of unit redemptions across the high-yield exchange-traded funds for the week ended Jan. 17. The prior week, the amount of inflows was the highest amount of weekly inflows over the past year and the fourth-highest amount over the past two years.

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