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Credit Insights

Rising Energy Prices Help Corporate Bonds Hold Value Relative to Treasuries

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Interest rates rose across the developed markets last week as unconfirmed media reports speculated that the European Central Bank may soon decide to begin to taper its asset purchase program. In the U.S., the entire interest rate curve shifted upward as the yield on the 2-year Treasury bond rose 7 basis points to 0.83%, the 5-year Treasury rose 11 basis points to 1.26% and the yield on both the 10- and 30-year Treasuries rose 13 basis points to 1.72% and 2.45%, respectively. While prices of corporate bonds slipped as well, relative to Treasury bonds, prices did not fall as much, as corporate credit spreads tightened. In the investment-grade market, the average spread of the Morningstar Corporate Bond Index tightened 6 basis points to +134 and in the high-yield market, the average spread of Bank of America Merrill Lynch High Yield Index tightened 21 basis points to +476. These levels represent the tightest that both indexes have registered since June 2015.

A substantial amount that the indexes tightened was generated by the energy sector as oil and natural gas prices surged higher. Within our investment grade index, the average spread of the energy sector tightened 18 basis points and within the high yield index, the average spread of the energy sector tightened 44 basis points. In addition, credit spreads tightened as investors that had cash they needed to put to work had to bid up prices in order to tempt current holders to sell. The amount of volume in the new-issue market has slowed recently as many companies enter their quiet period prior to releasing third-quarter earnings over the next few weeks; yet, even though the new-issue market was waning, volume traded in secondary market swelled higher, highlighting the ongoing demand for corporate bonds over other types of fixed-income securities.

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