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Credit Insights

Corporate Bond Markets Drift Higher

Year-to-date inflows of $20.1 billion are heavily weighted toward the high-yield ETFs.

Markets drifted higher last week as stocks rose and credit spreads tightened, but both markets gave back some of the gains on Friday. The pullback was in reaction to weak economic data released from China, which renewed concerns the United States might not be able to fend off contagion from global economic malaise throughout Asia and Europe. The concern was further reinforced by weak economic readings in the U.S. as both the retail sales and industrial production reports were below economists' expectations.

In the U.S. Treasury bond market, the yield curve steepened. The yield on the 2-year Treasury bond declined 2 basis points to 1.57% as investors priced in a higher probability that the Fed will cut the federal funds rate later this month; whereas, the yield on the 10-year rose 2 basis points to 1.75%. The spread between the 2-year and 10-year widened to 18 basis points, the highest this spread has registered since July and near its average level over the past 52 weeks. According to CME FedWatch Tool, the market implied probability the Fed will begin Halloween early on Oct. 30 with a treat (rate cut) rose to 89%. This is a substantial increase compared with as recently as one month ago when the probability of a 25-basis point rate cut to a range of 1.50% to 1.75% was only 28%.