there is a fine line between keeping cool and being complacent. credit markets appear to be skating on it. equity markets are being stirred by the recovery in donald trump <u+2019>s poll ratings. government bonds have been awoken by jitters about central banks and higher inflation . corporate bond markets, meanwhile, seem relatively oblivious. at 1.4 percentage points in the u.s. and 1.1 points in europe, the spread between the yield on investment-grade bonds and underlying government yields remains close to its lows for the year, according to bank of america merrill lynch indexes. importantly, central banks are still providing support to credit markets . the european central bank has vacuumed up <u+20ac>37.8 billion of investment-grade bonds since june. that has helped propel a rally that has spilled over into the u.s., and allowed the market to absorb heavy issuance from companies eager to take advantage of ultralow borrowing costs. investors might be relying too much on central-bank generosity. after all, the fortunes of the corporate bond market owe a good deal to the ultralow yields on government bonds that have underpinned the market. a surprise trump election victory, until recently discounted as improbable, is bound to cause greater volatility and lead to questions about u.s. monetary policy <u+2013><u+2013>which so far has been more reassuring than disruptive. there are some hints of fragility. u.s. high-yield bonds, which have been on a tear, have started to back up in the past week, although year-to-date returns are still over 15%. if there is more turmoil in equity and government-bond markets ahead, corporate bonds might not be able to ignore it much longer. write to richard barley at richard.barley@wsj.com
the curious pre-election calm in corporate bonds - wsj
richard barley