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Credit Insights

Wild Cards for Bonds

We continue to be leery of how political risk and a possible slowdown in emerging markets will affect the marketplace.

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While the bond market was closed last Monday for Columbus Day, the equity market rallied 3.4%, leaving the credit market to play catch-up for the rest of the week. The Morningstar Corporate Bond Index tightened 17 basis points to +248. The tightening was mainly due to outsize gains in the financials sector, which rallied 25 basis points, easily surpassing the 12 basis points of tightening in industrials. Among some of the financial sector bellwethers we watch, the greatest gainers included Bank of America (ticker: BAC, rating: BBB) notes due 2021, which tightened 50 basis points to +430, and Morgan Stanley (ticker: MS, rating: BBB) notes due 2021, which tightened 80 basis points to +430.

The combination of better-than-expected economic indicators in the United States and indications that policymakers in Europe continue to make headway on a coordinated plan to stem sovereign debt issues assuaged investor fears. As the political dimension quieted down, investors have been able to concentrate on individual issuer credit fundamentals. We wrote at the beginning of October that at these heightened credit spreads, credit risk is attractive from a fundamental viewpoint. In fact, we have found significant value in some of the more beaten-down issuers, such as those in deeply cyclical sectors. However, while credit risk is cheap compared with our view on the credit fundamentals, we continue to be leery of how political risk will affect the marketplace; the impact from European politics is always only one headline away from driving the market wider.

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