Fed cuts rates for first time in four years, US credit market risk index narrows to two-year low

On Wednesday local time, a key indicator measuring the risk in the US corporate bond market saw a slight decrease after the Federal Open Market Committee announced a rate cut to achieve a rare soft landing for the US economy. With credit risks diminished, the spreads of the Markit CDX North America Investment Grade Index narrowed by over 1 basis point to its narrowest level in two months, hovering near the narrowest level since the pandemic began. After Federal Reserve Chairman Powell warned against assuming further significant rate cuts, the market saw a sharp downturn as investors further digested this decision. Lower interest rates may stimulate investors to buy bonds to lock in yields before they drop further, but it could also lead to more companies issuing bonds, potentially depressing valuations. Bob Michele, Chief Investment Officer and Global Head of Fixed Income at J.P. Morgan Asset Management, said, "We tell clients, 'Just get into the bond market,' just buy regular bond funds. Yields are declining." So far this year, US corporations have sold over $1.2 trillion in investment-grade corporate bonds, a nearly 30% increase from the same period in 2023. Andrzej Skiba, Head of US Fixed Income at BlueBay Asset Management, believes the rate cut on Wednesday may encourage more companies to issue bonds to take advantage of the declining yields. Investors generally expect a slowdown in corporate bond issuance in the weeks leading up to the US presidential election, as the election could raise concerns about inflation and push up bond yields. However, Skiba believes fund managers may not have fully considered the potential impact of declining yields on corporate borrowing. Skiba said, "The idea of a slowdown in the issuance of primary bonds in the second half of the year may have subsided, as we expect a significant amount of supply to take advantage of rising government bond yields and issuance. The lower the yield, the more issuance there will be." The price-traded high-yield CDX index rose by nearly 0.3 cents in US dollars, then retraced most of its gains. Hunter Hayes, Chief Investment Officer at Intrepid Capital Management and Co-Head of Portfolio Management at Intrepid Income Fund, said, "We believe this rate cut is very beneficial for high-yield bonds and may provide an optimistic backdrop for refinancing later this year and into 2025."