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Credit Insights

Bond Market Mostly Ignores China Corporate Defaults, Ukraine Tensions

The market seems to believe that any potential contagion from the situation in the Ukraine or economic weakness in China will be extremely limited in the United States.

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Corporate credit spreads widened last week as the first defaults in China's domestic public bond market and the ongoing political tension in the Ukraine weighed on investor sentiment. With to the flight to safety, Treasury bonds recouped their prior weeks' losses, driving the interest rate on the 10-year Treasury down 14 basis points, back to 2.65%. 

As some investors decided to take a little risk off the table and lock in gains from earlier this year, the average spread in the Morningstar Corporate Bond Index widened 5 basis points to +120. However, this sell-off is very mild compared with the index's trading range over the past year. For example, at its current level, the index is still tighter than where spreads backed off to when the turmoil in the Ukraine pressured risk assets in late January. In addition, corporate credit spreads are still significantly tighter than last summer, when the corporate bond market sold off in sympathy with the rise in Treasury rates. Considering credit spreads are at their tightest levels since before the 2008-09 credit crisis, the takeaway from the current market action is that investors are confident that any potential contagion from the situation in the Ukraine or economic weakness in China will be extremely limited in the United States.

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