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Credit Insights

Strong Economic Data Propel Risk Assets Higher

Investment-Grade Bonds Fairly Valued, but Pockets of Overvaluation Appearing

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For the second week in a row, corporate credit spreads in the investment-grade bond market ended the week unchanged whereas high-yield credit spreads continued to tighten. In the investment-grade corporate bond market, the average spread of the Morningstar Corporate Bond Index held steady at an average credit spread of +150 basis points over Treasuries. In the high-yield market, the average credit spread in the Bank of America High Yield Index tightened 14 basis points to +608. Short-term Treasury bonds rose a few basis points but longer-term Treasury bonds remained unchanged. Although risk assets in the form of high-yield bonds performed well, the equity markets took on a life of their own. The S&P 500 made a run toward 2,100, rising 2.3%, but just barely missing that goal post and ended the week at 2,099. At this level, the S&P 500 is only 33 points below its all-time high.

Strong housing data, healthy durable goods orders and exports, and rising oil prices were more than enough to bolster investor confidence and overcome any negative sentiment driven by the prospects of rising interest rates. In fact, some of the data was so strong that Morningstar Director of Economic Analysis Robert Johnson, CFA, remarked "Some of the headlines were stunning, perhaps even too good to be true, with new home sales up an unexpected 16% in a single month. The year-over-year data in most reports was healthy, but not nearly as electrifying as the monthly data. So, just as we cautioned readers not to panic in February when things looked terrible, we now worry that some might become too optimistic. The potential of higher interest rates and demographics are likely to limit GDP growth to the low end of our normal 2.0%–2.5% range for the full year, with a temporary bounce to closer to 3% for the second quarter."

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