Complacency Continues to Broaden
With volatility at multi-year-low levels and plenty of liquidity looking for a home, any day with positive news allows asset prices to levitate.
After 10 straight days of gains, the equity market's winning streak finally came to an end Friday as the S&P 500 dipped modestly. The equity market's risk-on sentiment seems to be that so long as the Federal Reserve is injecting $85 billion of debt into the financial system every month, equities have nowhere to go but up. However, the corporate bond market seems more suspicious of this supposition, as corporate bonds have not participated in this rally to nearly the same degree. The average credit spread in the Morningstar Corporate Bond Index tightened only 1 basis point last week to +134 and has tightened only 3 basis points over the past two weeks.
Financials led the tightening last week as spreads with the sector contracted 2 basis points while the industrial sector was stagnant. Since the beginning of the year, our index has traded within a narrow 5-basis-point range; on a monthly basis in 2012, the index on average traded within a 15-basis-point range. Year to date, the Morningstar Corporate Bond Index has declined 0.63% as the 10-year Treasury bond has backed up 25 basis points to 2.00%, outweighing the additional return from corporate credit spread tightening.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.