Our Outlook for Global Credit Markets

Investment-grade bonds appear to be poised to return low- to mid-single digits in 2013

Dave Sekera, CFA 27 December, 2012 | 10:29AM

2012 Round-Up; 2013 Outlook

The combination of tightening corporate credit spreads and lower interest rates led to an outstanding return for Morningstar's Corporate Bond Index in 2012. Through to December 13, the index has returned 10.2%, thanks to a 100-basis-point compression in credit spreads, a 20-basis-point decrease in the 10-year Treasury bond and the return from coupon yield.

For 2013, it will be mathematically very difficult to enjoy anywhere near the same return unless one assumes that either credit spreads return to the tightest levels recorded (February 2007) or that interest rates will drop significantly below where they are currently trading, which is already near the lowest rates on record. Assuming corporate credit spreads tighten modestly and that interest rates remain steady, and considering that the yield on the Morningstar Corporate Bond Index is currently 2.40%, investment-grade bonds appear to be poised to return low- to mid-single digits in 2013.

As of December 12, the average credit spread within the Morningstar Corporate Bond Index has tightened to +146. Over the first quarter of 2013, credit spreads appear poised to modestly tighten further as strong technical factors support the corporate bond market. However, over the longer term, we think the preponderance of credit spread tightening is likely to have run its course. The tightest average spread of our corporate bond index since the 2008 credit crisis was +130 in April 2010, just prior to when Greece admitted its public finances were much worse than previously reported, thus beginning the European sovereign debt crisis. The absolute tightest level that credit spreads have reached in our index was +80 in February 2007, the peak of the credit bubble. Over a longer-term perspective, since the beginning of 2000 the average credit spread within our index is +176, and the median was +162.

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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.

About Author

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

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