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Credit Insights

Sliding Commodity Prices Send Credit Spreads Wider

We expect the high-yield sector to continue to outperform the investment-grade sector in the second half of the year.

Commodity prices have slumped over the past few months and picked up speed to the downside this month. Softening global economic growth, especially in China, has reduced demand for industrial raw materials. From iron ore to coal, prices for basic material commodities have fallen precipitously. In fact, the price of copper (which has one of the highest historical correlations to economic growth) has fallen to its lowest level since mid-2009. As these commodity prices have fallen, the average credit spread in the basic materials sector of the Morningstar Corporate Bond Index has risen 32 basis points since the end of last year to +220 basis points over Treasuries. Of this widening, 25 basis points has occurred just since the beginning of the month. This is widest level this sector has registered since mid-2013. The basic materials sector constitutes 5.5% of our index and is responsible for much of the widening of the overall investment-grade market.

As global economic growth has slumped, falling oil prices have also taken their toll on the credit markets. After stabilizing around $60 per barrel earlier this summer, oil prices resumed their decline, falling to $48 per barrel as of last Friday. The energy sector constitutes more than 10% of the Morningstar Corporate Bond Index and has widened 12 basis points since the beginning of the month to +203 basis points over Treasuries. This is the widest level the sector has traded since April, when oil prices were last below $50 per barrel.