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Credit Insights

Benign News Flow Holds Corporate Credit Spreads Steady

So long as the Fed continues its asset-purchase program at the current run rate, we don't expect interest rates to rise meaningfully and think they will remain range-bound.

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The average corporate credit spread in the Morningstar Corporate Bond Index held steady, ending the week at +136. While a few earnings reports prompted some changes in our recommendations, earnings and news flow was mostly benign from a credit viewpoint. The release of the Federal Open Market Committee's minutes after the October meeting was a nonevent. The minutes included a few minor changes, but none that appeared to indicate any changes in the Fed's outlook. Economic data released this week continued to suggest softening economic growth, but Robert Johnson, Morningstar's director of economic analysis, sees GDP growth remaining around 2%.

The current credit spread in our index is only 7 basis points higher than the tightest spread of 2013, reached in May at +129 basis points. The tightest our index has traded at since the 2008-09 credit crisis was +128, in April 2010. In "Our Outlook for the Credit Markets," published in September with the index trading around +147 basis points, we opined that corporate credit spreads would be pushed back to the bottom of the year's trading range, +129-165 basis points, in the near term. We also expected that corporate bond investors were poised to recapture a significant amount of the losses experienced earlier this year. The Morningstar Corporate Bond Index rose 1.54% in October and is now only down 1.07% for the year. While corporate credit spreads in the United States haven't quite reached their tightest level of the year, spreads in Europe have. In fact, European corporate credit spreads are trading at their tightest levels since May 2010.

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