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Credit Insights

Credit Markets Off to the Races

Over the near term, we expect credit spreads to continue to tighten, but longer term, we see possible unintended consequences from the Fed's recent actions.

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"Just close your eyes and buy it" is how one credit trader described the fixed-income market this past week. After the Fed put the official stamp on QE2--the second round of "quantitative easing" through which it will buy an additional $600 billion of long-term bonds in a bid to lower long-term rates and stimulate growth--the asset markets were off to the races.

Although the Morningstar Corporate Bond Index tightened just 3 basis points to +152, it felt like the credit market had tightened a lot more. In fact, in the derivative market, investment-grade credit default swap indexes tightened 8 basis points, which took credit spreads back to the levels experienced this spring. As a point of reference, this credit cycle mirrors the tightening cycle earlier this year. It took 74 days for CDS spreads to tighten approximately 30 basis points from +106 in February to +77 in April. In this recent cycle, it took 67 days for CDS to tighten the same 30 basis points from +106 in August. The equity markets have performed similarly, as the S&P 500 increased 15.2% from February to April and 16.8% from August to Friday's close.

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

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