Credit Spreads Return to Where They Started
The impact from the emerging-markets disruption barely dented the corporate bond market.
Corporate credit markets recaptured the spread widening that occurred at the end of January and beginning of February when the markets sold off as a result of turmoil in the emerging markets. At the end of last week, the average spread in the Morningstar Corporate Bond Index returned to +119, which is where spreads were in the middle of January and the end of 2013.
The impact from the emerging-markets disruption barely dented the corporate bond market, and on a longer-term chart, the pullback is only a minor blip. We continue to believe that from a fundamental, long-term perspective, corporate credit spreads are fairly valued based on our outlook for gross domestic product to rise between 2.0% and 2.5% this year. Across our coverage universe, our credit analysts generally have a balanced view that corporate credit risk will either remain stable or improve slightly, but that the tightening in credit spreads on those names will probably be offset by an increase in idiosyncratic risk (debt-funded M&A, increased shareholder activism, and so on). While the flight to safety has recently pushed the yield down on the 10-year Treasury to 2.75% from 3% at the end of 2013, we still expect interest rates will rise over the long term as the Fed tapers its asset-purchase program. With less market intervention from the Fed, interest rates should normalize towards historical averages compared with inflation, inflation expectations, and the steepness of the yield curve. As such, while the Morningstar Corporate Bond Index has risen 1.98% thus far this year, we think the corporate bond market will struggle to return much higher over the remainder 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.