U.S. credit spreads narrow after unprecedented Fed stimulus

NEW YORK (Reuters) – U.S. corporate credit spreads narrowed on Monday, indicating positive investor sentiment, following the Federal Reserve’s announcement that it would backstop an unprecedented range of credit.

The bid spread on the Markit Investment Grade CDX index dropped as low as 120.5 basis points, the lowest since March 17 CDXIG5Y=MG, from 155.5 before the announcement. The spread on the equivalent high yield index CDXHY5Y=MG dropped as low as 793 basis points, a level hit on Friday, from 897 prior to the announcement. Spreads of both indexes have widened dramatically as the coronavirus pandemic has roiled credit markets.

The spreads of Markit high yield and investment grade credit default swap indexes over safer benchmarks are widely used as a barometer of sentiment in the two respective corporate bond markets.

The Fed’s steps include establishing new programs that will lend against student loans, credit card loans, and U.S. government backed-loans to small businesses, as well as new programs to buy bonds of larger employers and make loans to them.

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