Credit spreads from U.S. investment grade to high yield and emerging markets tightened to mid-March levels but remained elevated compared with those seen before the coronavirus pandemic began to shake financial markets in February.
Risk-on sentiment saw the spread on U.S. high-yield corporate debt market contract sharply from 778 basis points to 735 basis points over the course of May 18 and May 19. However, it remains considerably higher than the sub-400 basis point average seen before the crisis erupted.
"With [interest] rates set to stay lower for longer, investors need to reassess cash and high-quality bond exposure, in favor of riskier assets like lower-quality credit," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a research note.
The improved appetite for risk benefited emerging-market credit as well, with spreads dropping to an average 481 basis points by May 19, a decline of 18 basis points from a week earlier and the lowest since March 16. However, they remain double the pre-crisis 2020 average of about 250 basis points.
Investment grade corporate debt spreads contracted by 14 basis points in two days to reach 206 basis points as of May 19, the lowest level since March 11.
While that is down significantly since the March 23 peak, they remain more than twice this year's low of 99 basis points from Jan. 22.
The percentage of the S&P Global-rated U.S. loan index priced below 80.0 — a closely watched indicator of stress — fell back to 14.51% by May 19, the lowest level since March 17 and well down on the peak of 56.78% on March 23.
A key risk indicator for the U.S. banking sector also eased further. The Libor-OIS spread, which measures the difference between the three-month dollar London interbank offered rate, the average cost for banks to borrow from each other, and the overnight indexed swap rate, was 30.46 basis points as of May 21, down from 34.07 basis points a week earlier.
There was also a decline in volatility in U.S. equities with the VIX — or fear gauge — falling from 35.28 on May 12 to 27.99 on May 21, the lowest level since April 8.