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Credit Insights

Corporate Credit Spreads Hold Steady While Equity Markets Slip

European banks downgraded; Kraft and Heinz to merge.

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We previously highlighted the recent divergence of the performances of the equity market and corporate bond market. While equity prices rose after the Federal Open Market Committee released its meeting statement and updated economic projections March 18, corporate credit spreads in the Morningstar Corporate Bond Index widened. This divergence corrected last week as equity prices fell but credit spreads were largely unchanged. The S&P 500 fell 2.2% (to slightly below where the index was before the FOMC statement) while the average corporate credit spread of our index was unchanged at +138. In the high-yield market, the Bank of America Merrill Lynch High Yield Master Index tightened a modest 5 basis points to +476.

While credit spreads have widened over the past few weeks, we think much of the widening occurred as the market had to digest an unusually large amount of new issuance. Over the next few months, we continue to expect that corporate bonds will remain well bid. As the European Central Bank's asset-purchase program prints new money to purchase sovereign bonds and asset-backed securities, the path of least resistance will be to reinvest those proceeds in corporate bonds. Much of the recent demand in the U.S. corporate bond market has been attributed to foreign investors in developed markets looking to pick up the higher all-in yield that U.S. corporate bonds offer and invest in the safety of the strengthening dollar. As we suspected the prior week, fund flows in the junk bond market turned around after two weeks of outflows, as the net amount of inflows rose to $900 million last week for open- and closed-end funds.

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