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Credit Insights

Dearth of New Issue Supply Allows Corporate Credit Spreads to Tighten

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Corporate credit spreads tightened across the board last week. As we enter earnings season, many corporations are in their quiet periods, leading to a dearth of new issue volume over the past two weeks. This has allowed the market to digest the voluminous amount of bonds priced in March. In addition, rising oil prices boosted bond prices in the beleaguered energy sector. In the investment-grade market, the average spread in the Morningstar Corporate Bond Index tightened 6 basis points to +130. Much of this tightening was led by the energy sector, which tightened 14 basis points as oil rose above $50 a barrel. The energy sector has outperformed the rest of the corporate bond market universe this year and has tightened 66 basis points since our Jan. 12 publication, in which we noted that oil prices had appeared to bottom out in the mid-$40s.

In the high-yield sector, the average spread of the Bank of America Merrill Lynch High Yield Master II Index tightened 22 basis points to +460. The energy sector in high yield easily outperformed the broader high-yield market as it tightened 50 basis points to end the week at +693. Investor demand has helped to push prices up, as there have been three solid consecutive weeks of positive fund flows entering high-yield mutual funds and exchange-traded funds.

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