Monetary Largesse Lifts Credit Market

Monetary policy seems to be driving the markets as opposed to fundamental analysis, which means investors should proceed with caution

Dave Sekera, CFA 11 September, 2012 | 1:36PM

Summer is over, the window to the new issue market has been thrown wide open, and the credit market is on fire. Portfolio managers continue to report receiving a flood of new money as funds flow into the fixed-income sector. Even with more than $17 billion of investment-grade bonds issued last week, fund investors still seem to have plenty of cash that needs to be put to work.

Credit spreads tightened 6 basis points in the Morningstar Corporate Bond Index as the average spread declined to +167 last week with the preponderance of tightening occurring after the European Central Bank (ECB) announced its new Outright Monetary Transactions programme on Thursday. Credit spreads have returned to their tightest levels since August 2011 and are slightly tighter than the average credit spread over the past 12 years.

Telefonica Takes the Lead

No firm was a bigger beneficiary of the frenzied demand for paper and growing optimism in the European sovereign market last week than Telefonica SA (TEF). On Wednesday, the firm issued €750 million 5.811% senior notes due 2017 at a spread of +485 over mid-swaps. Two days later, it returned to the market and added another €250 million to the same bond deal and priced those bonds at mid-swaps +390, almost 100 basis points tighter.

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About Author

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

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