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Credit Insights

Financial Markets Increasingly Complacent

With so many threats lurking and the ever-present risk that something strikes from left field, staying vigilant makes a lot of sense, warns Morningstar's Dave Sekera.

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The average spread in Morningstar's Corporate Bond Index has traded in a very narrow range lately and ended last week 1 basis point tighter at +136. Since the beginning of the year, our index has traded within a 5-basis-point band, whereas on a monthly basis in 2012, the index on average traded within a 15-basis-point range. In the high-yield market, the realized volatility as measured by high-yield exchange-traded fund  iShares iBoxx $ High Yield Corporate Bond (HYG) continues to decline.

The equity markets have been no exception to this complacency, as volatility as measured by the VIX has declined to its lowest levels since April 2007. Peripheral sovereign debt in Europe has settled into a relatively tight trading band, and the shapes of many countries' yield curves have steepened and normalized. For example, the yields on Spanish and Italian 10-year bonds ended the week at 5.18% and 4.38%, respectively. Both of these levels are near the middle of the range in which they have traded since the beginning of the year.

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