Volatility Continues to Rule Bond Markets

Despite company fundamentals supporting spread levels, the impact of interest-rate and equity-market moves is again being felt in the corporate bond market

Dave Sekera, CFA 19 June, 2013 | 1:46PM

Global equity markets experienced significant volatility last week, particularly in Japan after the Bank of Japan disappointed investors by not taking additional steps to boost the economy. This resulted in a drop of 6.4% for the Nikkei followed by a rebound of 1.9%. The S&P 500 also experienced intraweek volatility, at one point trading down more than 2% from last week's close before rallying, then fading once again to end the week down just over 1%. With concern beginning to spread about the liquidity crisis in Chinese banks, equity investors, like fixed-income investors, are increasingly focused on whether global central banks will continue to provide the monetary stimulus that underpinned the global rally in risk assets.

Volatility also continued in the US as markets responded to data and central bank commentary. The positive tone set in the previous week by the US May employment data carried over into last Monday, when Standard & Poor's raised its outlook on its US credit rating to stable from negative. The encouraging economic data continued during the week, with several better-than-expected reports buoying sentiment. 

The mix of economic data drove yields on the 10-Year Treasury higher, then lower; they eventually finished the week close to unchanged as market participants assessed the path of future Federal Reserve policy. While the 15-basis-point yield range experienced during the week pales in comparison with the rapid move higher in yield seen in May, it serves to highlight the continuing uncertainty in the interest-rate markets. In addition, this week saw several high-profile market pundits offer their opinion about when the Fed will begin tapering its asset purchases. With both sides of the discussion strongly argued, the market is looking for any hints about the Fed's intent when the statement from the two-day Federal Open Market Committee meeting is released later today.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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