'Buy 'Em All First, Let Research Sort It Out Later'
Technical factors may dominate in the credit markets for now, but fundamentals overrule in the long run.
The rate at which the average corporate credit spread is tightening slowed last week. The Morningstar Corporate Bond Index tightened only 2 basis points to +154, and the average credit spread in the Morningstar Eurobond Corporate Index was unchanged at +164. These are the tightest levels the market has traded at since last July.
While corporate bond credit spreads appear poised to modestly tighten further in the near term, at this point, we believe the preponderance of credit spread tightening has run its course. The tightest average spread of our index since the 2008-09 credit crisis was reached in April 2010 at +130, just before Greece admitted its public finances were much worse than previously reported, thus beginning the European sovereign debt crisis. Since the beginning of 2000 the average credit spread in our index was +177, and the median credit spread was +164. However, while the average credit spread contraction has slowed, the demand for corporate bonds has not. The new issue market continued to dominate trade flow because it was the only avenue for investors to find a meaningful amount of bonds to purchase as dealer inventories remain near their lows.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.