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Credit Insights

Corporate Bond Rally Grinds Along

Spreads are now tighter than they've been since last August but remain well wide of the levels seen a year ago.

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The corporate bond rally that started in earnest last fall continues to grind along. The Morningstar Corporate Bond Index tightened another 7 basis points over the past week to +188, nearly 80 basis points tighter than the widest point witnessed last October. Though spreads are now tighter than they've been since last August, they remain well wide of the levels seen a year ago.

We expect that developments in Europe will dictate whether credit markets head sharply higher or lower from here. News on this front was largely positive over the past week, with the German government signing off on the second round of Greek aid, European Union leaders agreeing to new fiscal restraints, and sovereign yields continuing to fall. In addition, the European Central Bank's latest long-term refinancing operation, offering cheap three-year financing to banks, attracted a level of demand that was spot-on with expectations. With EUR 530 billion added to the banking system, near-term liquidity concerns among European banks have been put to rest. Yet demand wasn't so strong to stoke fears that liquidity problems are, in fact, worse than feared.

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