Our Outlook for the Credit Markets

QUARTERLY OUTLOOK: Widening investment-grade credit spreads and rising interest rates lead to losses

Dave Sekera, CFA 27 June, 2013 | 10:26AM

Widening Investment-Grade Credit Spreads and Rising Interest Rates Lead to Losses

While the S&P 500 has risen about 12% this year and is near its record highs, corporate bond investors have grown relatively more cautious. From the beginning of the year through June 17, the average corporate credit spread in the Morningstar Corporate Bond Index has widened 8 basis points to 148. Combined with the 40-basis-point increase in the 10-year Treasury bond yield over the same time period, the Morningstar Corporate Bond Index has registered a 1.58% loss. Investors in European corporate bonds have fared much better as the average spread in the Morningstar Eurobond Corporate Index has tightened 13 basis points to 126 and the yield on 10-year German bonds has only increased by 20 basis points. This has resulted in a 0.99% gain in our Eurobond index.

Within the Morningstar Corporate Bond Index, the industrial sector has suffered the brunt of the losses this year, widening 12 basis points versus only 3 basis points of widening in the financial sector. Within the industrial sector, the most cyclical subsectors including basic materials, energy and transportation have performed the worst, widening 24, 24 and 16 basis points respectively. The technology subsector has outperformed the most, tightening 7 basis points.

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About Author

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

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