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Credit Insights

Trifecta of Risks Churning Under a Calm Surface

Investors are beginning to re-evaluate several concerns that had previously been assuaged.

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The average spreads in Morningstar's Corporate Bond Index and European Corporate Bond Index held steady last week at +192 and +222, respectively. However, lack of volatility in these indexes masked an undercurrent that many traders are feeling in the corporate bond market.

While the surface appears calm, underneath the placid waters investors are beginning to re-evaluate several concerns that had previously been assuaged. These include softer-than-expected economic metrics in the United States, which may portend weaker growth at home; rising interest rates in Spain and Italy, which may foreshadow sovereign and banking risks in Europe; and deceleration in emerging-market growth, which may indicate a harder-than-expected landing in China's economy. Offsetting these possible omens of tougher times ahead, earnings reports thus far this quarter appear to be generally positive. Although a few firms have alluded to a possible slowdown in growth caused by weakening European sales, we have not seen broad reductions in guidance for the year.

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