Key Highlights

● High-yield bond spreads tightened during the session.

● Investment-grade spreads held steady.

● The calm stood out against a hawkish Fed statement.

● Stocks also held their ground with the VIX easing.

Credit investors took the Federal Reserve's latest decision in stride. High-yield bond spreads tightened during the session, while investment-grade spreads held steady, a calm that stood out on a day when the Fed left its benchmark rate range unchanged but two officials voted for a hike, and long-dated Treasury yields pushed sharply higher.

A credit spread is the extra yield investors demand to hold a corporate bond instead of a Treasury of similar maturity, and when spreads tighten, buyers are accepting less compensation for risk, a sign of confidence rather than fear.

A Hawkish Hold From the Fed

The Fed's statement offered plenty for bond investors to digest, saying economic activity is expanding at a strong pace while inflation remains elevated, with the vote at 10-2, as Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in favor of a rate increase.

Fed Chair Kevin Warsh acknowledged pressure in credit markets, saying financial and credit conditions have tightened for some households and businesses, consistent with expectations, and that some credit spreads have widened, though Wednesday's session, at least in the junk market, moved the other way.

Treasury Yields Told a Different Story

Government bonds told a different story, with long-dated Treasury yields climbing sharply, posting their largest daily gain in a month, while the two-year eased, steepening the curve. That spreads still tightened suggests investors were comfortable with corporate credit risk even as the base cost of money rose.

Earnings also helped, with roughly 200 S&P 500 companies having reported third-quarter results and a large majority beating expectations, supporting confidence in corporate credit.