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Credit Insights

Racing Against the Clock, Issuers Evaluate Special Dividends

We may see a flurry of new issues before year-end as corporations evaluate debt-funded special dividends in order to return cash to shareholders before the income tax rate on dividends increases.

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During November, corporate credit spreads in the U.S. gave back some of the gains they made since early summer as the average spread in the Morningstar Corporate Bond Index widened out 11 basis points to +147. The financial sector continued to outperform; it only widened out 6 basis points compared with the industrial sector, which widened 16 basis points, and the utilities sector, which widened out 18 basis points. Credit spreads in Europe, however, tightened 5 basis points over the month to +145. As seen in the chart below, this is the first time since June 2011 that the average credit spread in our European Corporate Bond Index was tighter than that of the U.S. Corporate Bond Index.

Compared with earlier this year, day-to-day trading last week was influenced more by domestic as opposed to European issues. While the market seemed to stabilize by the end of the week, liquidity was fleeting intraweek as risk-on and risk-off volatility was driven by politicians' statements regarding the status of the fiscal cliff negotiations. One minute plenty of bids were present, and then the market immediately dried up the next minute.

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

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