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Credit Insights

Back to Precrisis Credit Spreads

While we continue to expect credit spreads to tighten over the course of the year, we expect the pace to slow dramatically.

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As we wrote at the beginning of December, we expected the U.S. credit market to quickly recapture the spread widening from the European sovereign credit crisis last November. Consequently, the Morningstar Corporate Bond Index tightened to +147 last week, which is a couple of basis points tighter than before the last European sovereign credit crisis. Since Dec. 2, the Morningstar Corporate Bond Index has tightened 15 basis points.

While we continue to expect credit spreads to tighten over the course of the year, we expect the pace to slow dramatically. Because of this, we recommend investors to take some profits off the table and return to a normal cash position, which will provide liquidity to take advantage of the significant amount of new supply on the docket (and resulting new issue concession) as well as dry powder to take advantage of the next sell-off when European credit issues lead to credit spread widening in the United States again.

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