Corporate Credit Spreads Unchanged
The corporate bond market couldn't maintain momentum in the face of interest-rate increases and new issue supply.
The corporate bond market tried to rebound two weeks ago but was unable to maintain positive momentum in the face of the persistent increase in interest rates and robust new issue supply. The average credit spread of the Morningstar Corporate Bond Index ended the week at +113, unchanged from the prior week. In the high-yield market, the average spread of the BofA Merrill Lynch High Yield Master Index widened only 1 basis point to +341. While institutional investors have continued to put money to work in the corporate bond market, the amount of new supply brought to market has been enough to satiate this demand. Although economic conditions remain steady, which typically provides a tailwind for corporate bond credit spreads, investors have been unwilling to pay up for corporate bonds in the face of rising interest rates.
Rising interest rates have pushed prices down on fixed-income securities thus far this year, and all of Morningstar's main fixed-income indexes are in the red. For example, through May 18, the Morningstar US Core Bond Index (our broadest measure of the fixed-income universe) has fallen 2.78% and the Morningstar US Government Bond Index has declined 2.50%. In the investment-grade corporate bond market, returns have been further pressured as corporate credit spreads have widened 17 basis points since the end of last year, resulting in a decline of 3.75% in the Morningstar Corporate Bond Index. However, with its shorter durations and greater sensitivity to economic conditions, the high-yield market has outperformed other fixed-income indexes to the downside as the BofA Merrill Lynch High Yield Master Index has fallen only 0.25%. Among other assets, the equity market pulled back slightly last week as the S&P 500 declined 0.54% but for the year has risen 1.47%.
Interest rates continued their march higher as the entire yield curve rose and steepened last week. On the shorter end of the curve, the yield on the 2-year Treasury bond rose 2 basis points to 2.55%, and in the belly of the curve, the yield on the 5-year Treasury bond rose 5 basis points to 2.89%. Yields on the longer end of the curve rose much faster as economic and inflation data came in hotter than expected. After failing several times to break through the psychological hurdle rate of 3%, the yield on the 10-year rose 9 basis points to end the week at 3.06%. This is the highest yield the 10-year Treasury has traded at since September 2011. At the longest end of the curve, the yield on the 30-year bond increased 10 basis points to 3.20%. Since the end of the year, interest rates have risen significantly as the 2-year, 5-year, 10-year, and 30-year bonds have risen 67, 68, 65, and 46 basis points, respectively.
Weekly High-Yield Fund Flows
Fund flows in the high-yield sector experienced a net outflow of $0.4 billion last week. While there was net unit creation of $0.2 billion in high-yield exchange-traded funds, this was more than offset by an outflow of $0.6 billion across open-end high-yield mutual funds. Year to date through May 16, there has been a total of $12.6 billion of outflows across the high-yield sector, consisting of $8.2 billion of outflows in open-end high-yield mutual funds and $4.4 billion of net unit redemptions in high-yield ETFs.
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.