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Credit Insights

Earnings Offset Economic Indicators in Bond Market

Earnings and credit fundamentals continue to be stable, but until we gain more clarity on the European sovereign debt crisis and the slowdown in emerging markets, a neutral stance on corporate bonds is warranted.

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The average spread of Morningstar's Corporate Bond Index and European Corporate Bond Index held steady last week at +192 and +223, respectively. Trading over the course of the week generally stayed within a very narrow band, and the new issue market was very quiet. Although we had seen a number of issuers access the capital markets after they released earnings the past few quarters, this time around investors were able to concentrate on the implications of earnings releases without that distraction.

Generally, earnings in our coverage universe have been in line to slightly stronger than expected. The few outliers to the downside appeared to represent issuer-specific problems rather than a potential slowdown in earnings momentum in general. However, many of the economic metrics and indicators released last week were softer than expected. While these metrics were below Street consensus, we think they indicate a slowly expanding economy.

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