Credit Spreads in the U.S. Continue Tightening Trend

Credit spreads have now recaptured one half of the spread widening because of the most recent sovereign crisis.

Dave Sekera 22.12.2010
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The Morningstar Corporate Bond Index tightened another 2 basis points last week to +153. Credit spreads have now recaptured one half of the spread widening because of the most recent sovereign crisis. Since Dec. 2, the Morningstar Corporate Bond Index has tightened 9 basis points. We expect the market to quickly recapture the rest of the widening as credit spreads in the United States continue their tightening trend in 2011.

It was a quiet week on the corporate bond trading desks as activity slowed. With little new issuance, activity was mainly directed toward year-end portfolio positioning by mutual fund managers and dealers clearing out stale positions before closing their books for the year. Treasury bond desks had more than their fair share of activity, however, as 10-year and 30-year interest rates surged 20 basis points by midweek, only to tighten back to where they started the week. The 10-year ended the week at 3.32% and the 30-year ended at 4.42%.

Europe
European corporate credit indexes were flat last week and continue to lag the spread tightening in the U.S. While the European index level may have been unchanged for the week, this masks significant movement underneath. Credit spreads for the financial sector widened 8 basis points, but were offset by continued tightening in the industrial sector. Unease in the financial sector is directly correlated to analysts' difficulty in assessing the credit risk to financials from the ongoing saga in sovereigns. European sovereign credit spreads continued to languish across the board at the wide end of the range as the week came to a close.

The good news for Spain was that it was able to issue new bonds last week; the bad news was that it sold less than hoped for and at rates much higher than where the country sold debt last month. Spain sold EUR 2.4 billion of bonds, EUR 0.6 billion less than the top end of the range it hoped to sell. The auction consisted of 10-year and 15-year bonds, which priced at yields of 5.45% and 5.95%, respectively. These yields are 83 and 141 basis points higher than the respective prior bond auctions. Spain's 4% notes 2020 ended the week at its lows, trading at 89.75 and yielding 5.42%, +245 over German Treasuries. While Ireland's 4.50% notes 2020 are trading higher than where they bottomed out at the end of November, they ended the week at 76.25, yielding 8.24% or +542 basis points over German Treasuries.

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