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Credit Insights

Investor Enthusiasm for Financial Sector Quickly Wears Itself Out

The spread between the financial and industrial components of our corporate bond index recently returned to the peak levels.

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Last week was a relatively quiet one. Only a few new issues were brought to market, investors finished cleaning up their books in preparation for year-end, and the news flow out of Europe died down.

The Federal Open Market Committee announcement was a non-event, but other economic metrics were generally positive, such as jobless claims, which fell to a new low for the year. Credit spreads, however, widened a couple of basis points, and the average spread in the Morningstar Corporate Bond Index rose to +255. The industrial sector was well bid and credit spreads were largely unchanged, but the financial sector widened out about 10 basis points as the enthusiasm from last week's EU summit died down. Most investors were encouraged by the European Union's agreement to instill greater fiscal discipline among the weaker European nations, but the lack of detail surrounding the agreement and enforcement measures curbed the enthusiasm. Illustrating this, the spread between the financial and industrial components of our corporate bond index returned to the peak levels. This widening spread indicates an increasing probability that the sovereign stress will negatively affect the financial system.

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