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Credit Insights

Turbulence Settles by End of Week; Credit Spread Performance Mixed

Investors no longer felt the need to hide in U.S. Treasuries.

The closing week-over-week levels across many asset markets were either mixed or relatively unchanged by the end of last Friday, as much of the daily volatility that occurred earlier in the week dwindled. As the turbulence settled, investors no longer felt the need to hide in U.S. Treasuries, and as demand diminished, Treasury prices resumed their decline. By the end of the week, the yield on the 2-year had risen 5 basis points to 2.90%, its highest since June 2008, and the yield on the 5-year increased 5 basis points to 3.05%, its highest since August 2008. In the longer end of the curve, the 10-year rose 3 basis points to 3.19% and the 30-year increased 5 basis points to 3.38%.

In the corporate bond market, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade market) widened 2 basis points to +115 last week. In the high-yield market, the BofA Merrill Lynch High Yield Master Index tightened 3 basis points to +351. As we have highlighted several times this year, rising interest rates have played a significant part in the divergence between the performance of the investment-grade and high-yield markets. With their lower credit spreads and longer average durations, investment-grade bonds' performance is more closely correlated to movements in interest rates than high-yield bonds. High-yield bonds typically have shorter durations and wider credit spreads, which are more closely tied to the performance of the underlying companies.