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Credit Insights

Credit Market Takes a Breath

We believe the preponderance of credit spread tightening is likely to have run its course over the near term.

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The average credit spread in the Morningstar Corporate Bond Index widened 2 basis points last week to +163. As one would expect, the widening occurred mostly in the BBB segment of our index and among the more highly cyclical sectors, such as basic materials.

The consumer product sector bucked the trend and tightened a basis point. Based on the movements in the corporate bond index since the beginning of August, it appears that many portfolio managers faded the rally. Among the nonfinancial sectors, the credit spread movements in our index suggest that investors have been rotat­ing out of the more cyclical sectors and into traditionally defensive areas, as well as favoring sectors with hard assets. In addition, both the A and BBB components of our index have tightened almost equally over the course of September, whereas we would expect greater tighten­ing in the lower-quality BBBs and among the higher-beta sectors in a typical rally.

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