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Credit Insights

Corporate Credit Spreads Continue to Trade in Narrow Range

Slowing consumption, falling exports, weak energy sector lead to stagnant GDP growth.

Over the past few months, corporate credit spreads have traded in a relatively narrow range. Rising oil prices have driven credit spreads tighter in the energy sector, which has largely offset widening credit spreads in other sectors. The average spread of the Morningstar Corporate Bond Index widened 2 basis points to end the week at +132, the same level the index has averaged since the beginning of March. In the high-yield market, the Bank of America Merrill Lynch High Yield Index tightened 3 basis points to +453. Oil prices continued to recover, rising to a little over $59 a barrel from $57. As oil prices have generally risen since we noted that they had appeared to bottom out in the mid-$40s in our Jan. 12 publication, the energy sector has outperformed the rest of the corporate bond market. In the investment-grade market, the average spread of the energy sector in the Morningstar Corporate Bond Index tightened 8 basis points to +181, and in the high-yield sector, energy tightened 34 basis points to +642.

Slowing Consumption, Falling Exports, Weak Energy Sector
Lead to Stagnant GDP Growth

Economic growth slowed to a near standstill in the first quarter as GDP rose only 0.2% on an annualized basis compared with last quarter. In fact, excluding an unusual 0.7% increase in inventory growth, GDP would have registered in negative territory. Consumption growth (which represents about 70% of economic activity in the United States) slowed to a 1.9% annualized rate from 4.4% last quarter. Among the other determinants of GDP that slowed growth this quarter, exports fell 1.0% and business structures fell 0.8%. The decline in exports was at least partially attributable to strikes at the West Coast ports, which have since been resolved. The decline in business structures was driven by significantly lower capital expenditures in the energy sector as the number of new drilling rigs plummeted. Slowing government expenditures were also a drag on the economy, as that component fell 0.2%.

Even though first-quarter GDP growth was slower than expected, Robert Johnson, Morningstar's director of economic analysis, continues to forecast that for the full year, GDP will expand 2.0%-2.5%. In his opinion, many of the factors that led to slow growth in the first quarter are temporary and will alleviate over the remainder of the year. However, even as the weather and the impact from the port strikes normalize, he does not expect that economic growth will strengthen much over his forecast. For additional detailed information regarding first-quarter GDP and Johnson's expectations, please see his weekly article, "In Search of the True GDP."