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Credit Insights

Corporations Take Advantage of Low Yields

Considering the uncertainty in future tax policy driven by the fiscal cliff negotiations, we suspect there will be one last push of new bond issues as corporations evaluate debt-funded special dividends.

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It was a relatively quiet week in the secondary market as the real action was once again in the new issue market. The average credit spread in the Morningstar Corporate Bond Index tightened 2 basis points last week to +145, which brought the spread down to its average level over the past two months. The average yield of the Morningstar Corporate Bond Index dropped to 2.58%, matching its lowest level since the index's inception in 1999.

Corporations took advantage of low interest rates as those issuers for which we provide credit ratings priced approximately $25 billion of debt. This new debt was easily absorbed by the marketplace, and new issuers generally traded well in the secondary market. Considering the uncertainty in future tax policy driven by the fiscal cliff negotiations, we suspect there will be one last final push of new issues this week as corporations evaluate debt-funded special dividends in order to return cash to shareholders before the tax rate on dividends increases. In addition, the new issue window will close for the holidays after this week, shutting the market for the rest of 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.