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Credit Insights

Rising Tide Leveling Off for Credit Sector

While credit spreads have tightened across the board over the past few months, we generally expect the rate of improvement in credit quality will stagnate as global economies weaken and corporate earnings are pressured.

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Credit spreads backed up 6 basis points last week, with the greatest widening occurring Thursday as the Morningstar Corporate Bond Index ended the week at +150.

Investors quickly became sellers as the markets digested another large slew of new issues and headline risk surrounding the fiscal cliff negotiations pressured markets. In fact, we heard from one bond trader that the amount of new issue volume over the past few weeks may have finally soaked up the cash sitting on the sidelines in many investor portfolios. This trader further reported that many clients were selling front-end paper to make room for new issues. While a rising tide has lifted all boats and credit spreads have tightened across the board over the past few months, we generally expect the rate of improvement in credit quality will stagnate as global economies weaken and corporate earnings are pressured. We believe this dynamic--tight spreads and stagnant credit quality--will limit further credit spread tightening and lead to greater differentiation among issuer credit quality over the near term.

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