Market Pain May Just Be Getting Started

If the past two trading sessions weren't clear enough, Wednesday's left no doubt: The surge in coronavirus infections and renewal of lockdown-like restrictions is bad news for stocks. And while equities always grab the initial headlines, in some ways, it couldn’t come at a worse time for the U.S. corporate-bond market.

Since early April, when the Federal Reserve outlined its unprecedented intervention into U.S. bond markets, corporate debt has been remarkably consistent, especially when considering the devastating blow to the U.S. economy from the Covid-19 pandemic. Even as stocks had their occasional stumbles, the yield spread between both investment-grade and junk-rated securities relative to Treasuries narrowed in each of the five months through August, according to Bloomberg Barclays index data. The gap widened a bit last month, but that could be explained away easily enough by the fact that both markets had their busiest September ever and reached record annual supply totals with a full quarter of 2020 remaining. The debt markets, as all onlookers were quick to say, remained wide open to any company that wanted to borrow.