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Credit Rally Takes a Breather

The average credit spread within the Morningstar Eurobond Index is the tightest its been since the summer of 2011, but this trend may not continue

Dave Sekera, CFA 23 November, 2012 | 6:00AM

The average credit spread within the Morningstar Eurobond Index declined as low as +147 basis points on November 8th. This is the tightest credit spread the index has reached since June 2011. Since the beginning of the year, credit spreads have tightened an astounding 170 basis points and are approximately 60 basis points from the tightest levels reached in January 2010 since the 2008/9 credit crisis. Between tighter credit spreads and lower treasury yields, the Morningstar Eurobond Bond Index has returned an impressive 11.69% year-to-date. Considering German treasury rates continue to hover near historic lows and corporate credit spreads have significantly less room to tighten, we caution investors not to expect this type of return next year.

The Morningstar Eurobond Bond Index has returned an impressive 11.69% year-to-date ... we caution investors not to expect this type of return next year

 

While a rising tide has lifted all boats and credit spreads have tightened across the board over the past few months, as the eurozone economies weaken and corporate earnings are pressured, we generally expect the rate of improvement in credit quality will stagnate. This will limit the amount of potential credit spread tightening and lead to greater differentiation among issuer credit quality.

US Credit Market

In the US, intra-month, the average credit spread within the Morningstar Corporate Bond Index declined as low as +133 basis points. This is the tightest credit spread the index has reached since the European sovereign debt crisis first reared its ugly head in April 2010. The index backed off slightly to +136 by the end of the October and continued to widen after the presidential election, reaching +146 on November 13 (still 8 basis points tighter than the end of September). Since the beginning of the year, credit spreads have tightened 103 basis points. Between tighter credit spreads and lower treasury yields, the Morningstar Corporate Bond Index has returned an impressive 10.66% year-to-date.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.