Corporate Bond Market Continues to Digest Deluge of New Issuance from January.
Although major U.S. stock market indexes hit new all-time highs last week, corporate credit spreads were a touch weaker. The average spread of the Morningstar Corporate Bond Index, our proxy for the investment grade bond market, widened one basis point to +126 last week and in the high yield market, the credit spread of the Bank of America Merrill Lynch High Yield Master Index widened 4 basis points to +390. While current levels are wider than their historical lows reached in 2007, the current levels in the corporate bond markets are the tightest that credit spreads have registered since fall 2014 and significantly tighter than their long-term averages. The average spread of the Morningstar Corporate Bond Index is 42 basis points tighter than its long-term average of +168 since the end of 1998. The average spread of the Bank of America Merrill Lynch High Yield Master Index is currently 190 basis points tighter than its long-term average of +580 basis points since the end of 1996.
David Sekera, CFA, is managing director of corporate bond ratings and research for Morningstar Credit Ratings, LLC.
After a record amount of new issuance was brought to the corporate bond market in January, new issuance slowed down markedly last week. With the lower amount of new issues looking for a permanent home, secondary market trading levels also slowed from their prior highs; however, trading volumes remained above average as the corporate bond market is continuing to digest the large deals brought to market in late January.
Concurrent with the slowdown in trading activity and softness in the corporate bond markets, fund flows into the high-yield asset class were essentially unchanged last week. The small amount of inflows into exchange-traded funds offset the amount of outflows among the open-end mutual funds.