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Credit Insights

First Pullback in Corporate Credit Spreads in 10 Weeks

We continue to view credit spreads as fairly valued, albeit at the tight end of the range that we see as appropriate, given our economic outlook.

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The average credit spread in the Morningstar Corporate Bond Index widened 5 basis points to +121 last week. This is the first time that our index has widened on a weekly basis since Nov. 8, some 10 weeks ago. While the basic materials sector weakened a little more than other sectors, credit spreads generally widened out across the board. We continue to view credit spreads as fairly valued, albeit at the tight end of the range that we see as appropriate, given our economic outlook. 

Other risk assets fell as well, as the S&P 500 fell 2.6% last week. The S&P attempted to hold its support at 1,800, but once that level was breeched, it was all downhill from there for the rest of the trading session Friday. The equity market's fear gauge, the VIX, soared 32% to 18.1, the highest since last October. As the markets sold off, the 10-year Treasury rose in a flight to safety, sending its yield down 9 basis points to 2.74%, its lowest since last November. Except for a few high-profile companies whose shares rose after reporting earnings, investors have been generally disenchanted with results. Top-line growth has remained sluggish, guidance has been lackluster at best, and a significant part of earnings growth has been low quality (tax changes, addbacks, or share buybacks) as opposed to sustainable improvements in the underlying business. Reporting season kicks up in earnest this week, as about 25% of the companies in the S&P 500 are scheduled to release earnings. 

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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