The Federal Reserve cuts interest rates for the first time in four years, and the U.S. credit market risk indicators narrow to a two-year low

According to the financial news app Zhitong Finance, on Wednesday local time, after the FOMC announced a rate cut to achieve a rare soft landing for the U.S. economy, a key indicator measuring the risk of the U.S. corporate bond market slightly decreased.

With credit risk decreasing, the spread 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 outbreak of the pandemic.

Following Federal Reserve Chairman Powell's warning not to assume further significant rate cuts, investors further digested this decision, leading to a significant market downturn. Lower interest rates for corporate bonds may stimulate investors to purchase bonds to lock in yields before yields fall further, but it may also lead to more companies issuing bonds, potentially depressing valuations.

Morgan Stanley Asset Management's Chief Investment Officer and Global Head of Fixed Income, Bob Michele, stated: "We tell clients, 'Just get into the bond market,' just buy regular bond funds. Yields are declining."

So far this year, U.S. companies have sold over $1.2 trillion in high-grade corporate bonds, an increase of nearly 30% compared to the same period in 2023. Andrzej Skiba, Head of U.S. Fixed Income at BlueBay Asset Management, a subsidiary of Royal Bank of Canada, mentioned that Wednesday's rate cut may encourage more companies to issue bonds to take advantage of falling yields.

Investors generally expect a slowdown in corporate bond issuance in the weeks leading up to the U.S. presidential election, as the election may raise inflation concerns and bond yields. However, Skiba stated that fund managers may not have fully considered the potential impact of declining yields on corporate borrowing.

Skiba said: "The idea of a slowdown in first-tier bond issuance in the second half of the year may eventually be dispelled, as we expect a considerable 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 USD, then retraced most of the gains.

Hunter Hayes, Chief Investment Officer of Intrepid Capital Management and Co-Portfolio Manager of Intrepid Income Fund, commented: "We believe this rate cut is very favorable for high-yield bonds and may provide an optimistic backdrop for refinancing later this year and even in 2025."