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Credit Insights

Enjoy the Quiet While It Lasts

Over the course of the next month, we expect a number of events may cause a disruption in the calm we have experienced.

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Now that earnings season is essentially over and European politicians are on vacation (and thus out of the headlines), volatility has dropped substantially. As volatility bounces along its lowest levels for the year, the flight to safety has receded, allowing markets to march higher and prod investors to reach for additional yield.

The average spread in the Morningstar Corporate Bond Index tightened 2 basis points to +174 last week, and the average spread on the Morningstar Eurobond Corporate Index tightened 9 basis points to +181. Both of these indexes have tightened to the lowest spread levels over the past year. The average spread in the eurobond index continues to be wider than the U.S. corporate index but may continue to tighten faster than the U.S. index during this cycle of "risk on" attitude. This could allow for some outperformance by investors with the ability to switch between dollar- and euro-denominated assets.

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