Buy 'Em All First, Let Research Sort It Out Later

Technical factors may dominate in the credit markets for now, but fundamentals will overrule in the long run

Dave Sekera, CFA 25 September, 2012 | 9:54AM

While corporate bond credit spreads appear poised to modestly tighten in the near term, at this point, we believe the preponderance of credit spread tightening has run its course. The tightest average spread of our index since the 2008-09 credit crisis was reached in April 2010 at +130, just before Greece admitted its public finances were much worse than previously reported, thus beginning the European sovereign debt crisis. Since the beginning of 2000, the average credit spread in our index was +177, and the median credit spread was +164.

While the average credit spread contraction has slowed, the demand for corporate bonds has not. The new issue market continued to dominate trade flow because it was the only avenue for investors to find a meaningful amount of bonds to purchase as dealer inventories remain near their lows.

One example of the activity in the new issue market last week is Ford Motor Credit Corporation. The company issued 10-year bonds at a spread of +260 over Treasuries. The original whisper talk was +280, which was subsequently tightened to +265 when official price guidance was released. The issue immediately traded up in the secondary market and ended the week at +235. We were not surprised that the notes tightened, as we think fair value for the notes is roughly +225, but 25 basis points in a day for one of the largest bond issuers is a very significant move over such a short period.

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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.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
FedEx Corp283.56 USD2.76
Intel Corp48.20 USD-10.58
Norfolk Southern Corp215.40 USD1.07

About Author

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

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