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Credit Insights

Corporate-Bond Markets Yawn at Bernanke, While Sequester Generally a Non-Event

While the sequester will affect some sectors more than others, it won't have a significant near-term impact on the corporate credit markets, says Morningstar's Dave Sekera.

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While there were pockets of weakness earlier last week, credit spreads in the United States were generally unchanged. The average credit spread in the Morningstar Corporate Bond Index closed at +136. In our view, nothing noteworthy came about from Federal Reserve chairman Ben Bernanke's congressional testimony, and we yawned along the with the rest of the credit market as the sequester went into effect. While the sequester will affect some sectors more than others, we don't view it as having a significant near-term impact on the credit markets.

In the near term, defense contractors will probably be some of the most affected by the sequester, although to varying degrees. From a credit viewpoint, we prefer firms with exposure to commercial aerospace and long-lived defense programs as well as those issuers with larger international exposure, which will help soften the blow of domestic spending cuts. We think firms with higher reliance on information technology will be the most negatively affected by the sequester. Narrow-moat  Raytheon (RTN) leads the way for global exposure with 26% of 2012 sales to international customers. Narrow-moat  Boeing (BA) and wide-moat  General Dynamics (GD) are right behind at 24% and 21%, respectively. Wide-moat  Lockheed Martin (LMT) benefits from its positioning in long-lived tactical aircraft and also has a comparatively smaller exposure to IT spending as a percentage of sales. To the downside,  SAIC (SAI) has very high IT exposure and is also splitting into two companies later this year, which makes it a strong candidate for a rating downgrade. Below, we will discuss further detail on the sequester's impact in the defense sector.

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

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