Credit spreads in the investment-grade sector continued to leak wider last week as the average spread of the Morningstar Corporate Bond Index widened 4 basis points to +154. Year to date, credit spreads have widened 14 basis points and are now at their widest level of the past two years. Over the past few months, credit spreads in the investment-grade space have been driven wider by a combination of idiosyncratic risk along with a general widening across the investment-grade bond universe. With the Federal Reserve intimating to the market its intention to begin raising short-term rates later this year, fixed-income investors have looked to reduce interest rate exposure.
Idiosyncratic risk has mainly been driven by two factors. First, with organic revenue growth among global corporations constrained and operating margins near their historical peaks, strategic acquisitions have continued to flourish this year as management teams delve for opportunities to expand their businesses. Second, with the stock market providing lackluster gains thus far this year, shareholder activists continue to press management teams to enact financial engineering in an attempt to enhance equity value, which often comes at the detriment of credit quality.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.