Market Update: October 2017

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Corporate Spreads Tightening

Corporate spreads, or the difference in yields on a corporate bond and a Treasury bond with a similar maturity, have generally declined over the past year. In part, this reflects strong overall credit conditions as the default rate in the year ended in August fell to 2.9% according to Moody’s Investors Services. However, tightening spreads pose risks for investors who increasingly believe corporate bond yields do not adequately compensate them for credit risk. According to a recent Bank of America Merrill Lynch survey, 81% of global fund managers said corporate bond markets are “overvalued.”

Source: Wall Street Journal


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Fed Plans to Shrink Balance Sheet

The Federal Reserve confirmed in September that it will begin shrinking its balance sheet in October. The Fed’s balance sheet has grown substantially through a program known as Quantitative Easing, which was intended to help keep interest rates low. The balance sheet wind-down will begin by allowing $10 billion of securities to mature every month without reinvesting the principal. The Fed’s clearly articulated plan should provide a level of market stability, but the full market impact is unknown. Less buying by the Fed may push up long-term rates somewhat. This impact may be offset by investors who view the Fed’s wind-down as slowing growth, reducing inflation expectations and ultimately placing downward pressure on long-term rates.

Source: Wall Street Journal, Prudent Man Advisors, Inc.

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