Rising Tide Levelling Off for Credit Sector

We generally expect the rate of improvement in credit quality to stagnate as global economies weaken and corporate earnings are pressured

Dave Sekera, CFA 20 November, 2012 | 2:00PM

Credit spreads backed up 6 basis points last week, with the greatest widening occurring Thursday as the Morningstar Corporate Bond Index ended the week at +150.

Investors quickly became sellers as headline risk surrounding the US fiscal cliff negotiations pressured markets, which were simultaneously tasked with digesting another large slew of new issues. In fact, we heard from one bond trader that the amount of new issue volume over the past few weeks may have finally soaked up the cash sitting on the sidelines in many investor portfolios. This trader further reported that many clients were selling front-end paper to make room for new issues. While a rising tide has lifted all boats and credit spreads have tightened across the board over the past few months, we generally expect the rate of improvement in credit quality will stagnate as global economies weaken and corporate earnings are pressured. We believe this dynamic--tight spreads and stagnant credit quality--will limit further credit spread tightening and lead to greater differentiation among issuer credit quality over the near term. 

Even though the credit market weakened last week, the new issue market provided plenty of volume for investors to choose from. We counted $30 billion worth of deals priced last week among the issuers we cover. 

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About Author

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

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