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Credit Insights

Market Seems More Wary of Financials

Credit spreads for nonfinancial issuers (especially those in defensive sectors) held up better last week than financials, which widened significantly versus the rest of the market.

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Between the strong new issue market, volatility in daily credit and equity market movements, and the Federal Open Market Committee announcement, last week was not the typical sleepy week in August.

Following the weakening that marked the end of the prior week, credit spreads generally widened last week. The Morningstar Corporate Bond Index, which tracks the cash bond market, widened only 3 basis points, but the credit default swap market widened even further. Credit spreads for nonfinancial issuers (especially those in defensive sectors) held up better than financials, which widened significantly versus the rest of the market. Financials with the greatest exposure to credit counterparty risks (such as the investment banks) were subject to the greatest amount of spread widening. There appears to be an undercurrent swelling where the market is making a greater differentiation in pricing risk between financials and nonfinancials than we have seen since the beginning of July. While the cash bond and CDS indexes widened mostly because of the financials, the credit market continued to be well bid for defensive names.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.