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Credit Insights

Corporate Bond Market Rebounding

Tech investors burned by earnings disappointments and recapitalization.

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The corporate bond market stabilized and credit spreads recaptured some of the widening they suffered in the first half of October. As the stock market bounded some 4.1% higher last week, lower-rated bonds outperformed the broader market. While the Morningstar Corporate Bond Index tightened only 1 basis point to +125, the BBB- tranche of the index tightened 5 basis points. Even further down the quality spectrum, in the high-yield space, the Bank of America Merrill Lynch High Yield Master II index tightened 30 basis points to end the week at +438.

Even though corporate bonds made some headway in recovering their losses over the past month, this recent rally has lagged the rebound in the equity market. Part of the reason that corporate credit spreads have not yet rebounded to the same degree as the stock market is investors' expectations that there will be plenty of new issue volume over the next few weeks. As portfolio managers are digesting the earnings reports, they are also deciding how they want to position their portfolios for year-end. They assume that they will be able to use such a sizable new issue calendar to readjust their sector and issuer weightings.

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