“Risk-off” may become the mantra, strategically more than tactically. Most markets are looking to shed risk after a flow of risk buying. Investment Grade corporates have enjoyed a tear and that looks suspicious when you notice that almost 40% of investment grade is in Financials; and a good chunk of those financials are in European financials. Investment grade may also totter from reports that senior debt holders in Europe may have to absorb some losses; senior debt holders are usually “sacred” but the scale of losses and financial medicine that has to be dished out may mean this sacred “sr unsec” realm may be breached. Meanwhile, Spanish 10 year yields are above 7% while the Euro drama continues. 5 yr investment grade spreads are at +110 bps over swaps, on average. High Yield has also been well subscribed to and the sector has been more high yield buying than the whole of last year! It is true that corporations are sitting on trillions of dollars of cash but it is interesting that they are not putting the cash to work as CAPEX until they see viable returns down the pipe that justify such risk positioning.
Coming week in Credit Markets