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Credit Insights

Fed Pushes Harder on a String

Low interest rates in and of themselves won't alleviate structural problems.

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Corporate bond markets continued to rally last week as portfolio managers flush with cash scoured the market for bonds and drove corporate credit spreads tighter. The Morningstar Corporate Bond Index tightened 13 basis points to +218. The financial sector (which took the brunt of the credit spread widening last fall) significantly outperformed the industrial sector by a 3-to-1 ratio.

We first opined at the beginning of October that corporate bonds were cheap on a fundamental basis as credit spreads had widened out to recessionary-type levels. Last week we wrote that there was still room for credit spreads to tighten; however, as we reach the point where credit spreads bottomed out at the end of last October, we think further tightening will be limited until there is additional clarity on the situation in Europe.

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