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Credit Insights

Credit Spreads Widen on Emerging-Markets Turmoil

At this point, the instability appears to be contained in relatively small geographic regions.

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The average credit spread in the Morningstar Corporate Bond Index widened 6 basis points to +128 last week and has increased a total of 9 basis points for the month. This minor pullback has been uncomfortable, but considering that credit spreads were at their tightest levels since before the 2008-09 credit crisis earlier this month, we are not too concerned that these slightly wider spreads will affect either the availability of credit to corporations or trading liquidity. 

The banking sector took the brunt of the losses, widening 14 basis points on average in January. The transportation sector fared the best, as the average spread in the sector tightened 4 basis points for the month. Even though credit spreads have widened thus far this year, the Morningstar Corporate Bond Index has risen 1.57% because of the decline in interest rates. As turmoil erupted among several emerging markets and currencies plunged in those countries, investors flocked to the safety of U.S. Treasury bonds, pushing the yield on the 10-year Treasury down 36 basis points to 2.67%.

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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