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Credit Insights

And Then Panic Set In

Credit spreads wider, but demand for 'right kind' of investment-grade bonds continues.

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Nervousness in the corporate bond markets has been palpable thus far this year. While the credit spreads for investment-grade and high-yield corporate bond indexes have been widening since last summer, the widening had been relatively orderly. The weakness was in response to the decline in commodity prices, and most of the significant widening within the indexes had been contained to sectors most correlated to the energy and metals and mining. These sectors have continued to underperform this year, yet investors are becoming increasingly cautious that credit spreads of other economically sensitive sectors may begin to deteriorate more rapidly. Last year, the main concern was that the economic deceleration among Asian economies would lead to credit rating downgrades and defaults among the energy and metals and mining sectors (which is coming to fruition). More recently, the anxiety is expanding to other cyclical sectors as contagion from China and other emerging markets may be spreading and could negatively affect domestic economic growth.

After stabilizing last fall, asset prices in China and the emerging markets resumed their slide at the beginning of this year. Year to date, the Shanghai SSE Composite Index has dropped 18%, and since its peak last June, it has dropped 44%. In the fixed-income markets, the Morningstar Emerging Market Composite Bond Index has fallen 1.21% thus far this year. Underlying the composite index, the Morningstar Emerging Market Sovereign Bond Index has declined 1.31%, the Morningstar Emerging Market Corporate Bond Index has declined 1.44%, and the Morningstar Emerging Market High Yield Corporate Bond Index has declined 2.14%.

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