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Credit Insights

Corporate Bonds Languish as Equity Markets Roar Ahead

Stronger-than-expected economic indicators prompted investors to rethink when the Federal Reserve may begin to taper its asset-purchase program.

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In a week of mixed economic indicators, the average corporate credit spread in the Morningstar Corporate Bond Index held steady, ending the week at +137; however, long-term interest rates rose. The yield on the 10-year Treasury rose 13 basis points to 2.75%, with the preponderance occurring Friday. 

For the week, rising interest rates pushed the Morningstar Corporate Bond Index down 0.74%. Stronger-than-expected economic indicators prompted investors to rethink when the Federal Reserve may begin to taper its asset-purchase program. While we doubt the Fed will begin to taper its asset purchases as soon as its December meeting, with these stronger reports the potential for the taper to begin sooner rather than later is certainly higher. After having suffered from the sharp sell-off in both interest rates and widening credit spreads this summer because of the expectation that the Fed was going to begin tapering in the fall, investors are once again hesitant to invest in longer-dated corporate bonds. While the equity markets have been roaring ahead over the past few months, credit spreads are languishing. Since the beginning of August, the S&P 500 has risen 5%, whereas the average credit spread in our corporate bond index has tightened only 5 basis points. In fact, since May 15, when our index hit its tightest level for the year at +129, the S&P 500 has risen 6.7%.

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

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