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Credit Insights

Credit Markets in the Eye of the Hurricane?

Tone remains cautious as investors weigh political and economic risks and dealers have been paring holdings.

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After the volatility across all asset classes and the barrage of headlines over past few months, last week felt like the eye of the hurricane. The Morningstar Corporate Bond Index widened only 4 basis points last week to +181, as the financial and nonfinancial sectors weakened equally. Over the past six months, credit spreads have outperformed the equity markets. For example, when the Morningstar Corporate Bond Index was last at +180 in December 2009, the S&P 500 was at 1109 compared with its Friday close at 1089, a 1.8% decline.

The TED spread halted its widening trend and ended the week at 38 basis points. Risk aversion abated as 10-year Treasury bonds gave up some of the prior week's gains and LIBOR steadied at 0.54%. Foreign exchange rates stabilized after experiencing large swings the prior week, which led to European corporate credit spreads mirroring U.S. corporate spread movement. As we highlighted in past issues, corporate credit spreads in Europe have underperformed the United States as the repricing of credit risk emanating from European sovereigns rippled through the rest of the fixed-income sector.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.