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Credit Insights

Prospect for Trade Truce With China Drives Credit Spreads Tighter

Year-to-date inflows into the high-yield asset class remain a solid $18.4 billion.

Sentiment in the marketplace last week was completely driven by the on-again, off-again, and finally back on-again trade negotiations with China, ending the week on a positive note. Concluding the negotiations on Thursday and Friday, the two countries reached an agreement on the first phase of a trade deal. The agreement reportedly will delay the implementation of tariffs that were scheduled to begin this week and covers several different subjects that have been heavily contested, including intellectual property, access to the Chinese financial markets, and purchases of agricultural products. The markets were further bolstered by the announcement from the Federal Reserve that starting on Tuesday, it would begin purchasing Treasury bills in the open market at a pace of $60 billion per month. The purchases are expected to provide enough extra reserves and liquidity into the banking system to alleviate the strains experienced in the repurchase market over the past few weeks.

On Thursday and Friday, risk assets surged, sending the equity market up, credit spreads tighter, and economically sensitive commodities such as oil and copper higher. In the corporate bond market, on a week-over-week basis, the Morningstar Corporate Bond Index tightened 4 basis points to +120 and in the high-yield market, the ICE BofAML High-Yield Master II Index gapped 28 basis points tighter to +410.