Skip to Content
Credit Insights

Weak Spanish Bond Auction Reminds Markets Europe Is Still a Risk

If the situation in Europe deteriorates, the contagion from heightened sovereign credit risk will affect the corporate credit markets, and spreads will widen across the board.

Mentioned: , , , , , , ,

Corporate credit spreads tightened slightly during March, but the market quickly gave up its gains in the first half of April. Part of the reason for this weakness was a response to the accelerating pace at which Spanish and Italian government bonds were falling. Spanish and Italian bond prices peaked in early March and gradually retreated over the course of the month.

We were not concerned about the gradual decline after the strong rally following the European Central Bank's last long-term refinancing operation; however, we are becoming increasingly concerned about the recent accelerating rate at which the countries' bonds are falling. In October, we highlighted that we thought credit spreads were cheap on a fundamental basis, and the Morningstar Corporate Bond Index has tightened 75 basis points since then. However, we believe a more neutral stance is warranted under the current conditions. If the situation in Europe deteriorates, the contagion from heightened sovereign credit risk will affect the corporate credit markets, and spreads will widen across the board.

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