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Credit Insights

What a Difference One Economic Data Point Makes

As soon as the employment number was released Friday morning, everyone immediately became a buyer of corporate bonds.

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What a difference one economic data point makes. All week long, every investor in the corporate bond market was a seller, but as soon as the employment number was released Friday morning, everyone immediately became a buyer. With payrolls coming in at 175,000--little higher than consensus--and the unemployment rate weakening slightly to 7.6%, investors could read into the report whatever they were already predisposed to believe. As the prices of long-term Treasury bonds and commodities (especially precious metals) fell, those investors were probably heeding the predictions of the economists who purport that the payroll report supports tapering of the Fed's asset purchase program this summer. Considering the S&P 500 rose 1.3% on Friday, it appears equity investors are in the camp that the employment report was strong enough to support continued economic growth, but not so strong as to prod the Fed into tapering its quantitative easing program.

Credit spreads widened all week long, as the average spread of the Morningstar Corporate Bond Index rose 10 basis points, reaching +147 at the close Thursday, its widest level thus far this year. However, corporate bond spreads tightened on Friday, sending the index to +145 by the end of the week. Since we changed our view on the corporate bond market to neutral from overweight last fall, the average credit spread has ranged between +130 and +155, averaging +140. We continue to view the corporate bond market as fairly valued, although we acknowledge that the near-term momentum will probably push credit spreads tighter early this summer toward the low end of the aforementioned range.

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