Credit Markets Poised to Resume Rally
Now that Greece has successfully pulled off what is essentially an out-of-court bankruptcy restructuring, we think the credit market will pick up speed again.
In October, we highlighted that corporate credit spreads were cheap on a fundamental basis and the corporate bond market has rallied significantly since then. However, we moved to a more neutral stance a few weeks ago as we thought that the preponderance of credit spread tightening had occurred and the market would pause until greater clarity emerged regarding Greece's proposed debt restructuring. Now that it appears that Greece has successfully pulled off what is essentially an out-of-court bankruptcy restructuring, we think the credit market will resume its rally.
Corporate credit spreads ended last week largely unchanged as the market quickly rebounded from Wednesday's losses. At +188 basis points, the Morningstar Corporate Bond Index is 80 basis points tighter than the widest levels we experienced last October (+267), and about 50 basis points wider than the tightest levels last April (+134). During the next month or two, we think corporate credit spreads could tighten back to last April's levels. Although some of Greece's bondholders who own bonds that were issued under foreign law may try to either block the collective action clauses or accelerate their bonds, we don't think these actions would subvert the restructuring. We do not foresee any other near-term hurdles in the short run that could pressure the credit markets. With the Greek drama over (for now, anyway), over the medium term, we think investors will turn their focus to first-quarter earnings reports, which will begin in mid- to late April. Another possible headwind facing the markets will be a slowdown in the growth rates of the emerging markets. For example, on Wednesday, China reduced its 2012 target gross domestic product by 50 basis points to 7.5%; in Brazil, fourth-quarter GDP growth decelerated to 1.4%, lower than the 2.7% the country reported for the full year.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.