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Credit Insights

European Sovereign Debt Crisis Approaching an Apex

The longer-term trend for the corporate bond markets will depend on this week's European summit.

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We opined two weeks ago ("Liquidity in Corporate Bond Market Drying Up") that the overhang of systemic risk from Europe would push corporate credit spreads wider until Europe devises a solution to address the structural imbalances and overindebtedness of peripheral nations. The week thereafter, spreads widened another 20 basis points, but the recent coordinated action by central banks was enough to halt the widening trend and begin a relief rally in corporate bonds. The credit markets lagged the upward movement in the equity markets at the beginning of the week, but by the middle of the week, credit spreads began to follow suit and tightened about 8 basis points.

While the coordinated nature of the action highlights central banks' willingness to provide liquidity in the market, we think the longer-term trend for the corporate bond markets will depend on this week's European summit. If politicians are able to agree upon a plan to institute fiscal discipline throughout the eurozone, we think this is the beginning of a much longer-term rally; however, if the announcement is another panacea to alleviate the symptoms of the underlying solvency issues, then this rally will be a small blip on a continuing widening trend.

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