Credit has been moving sideways but a tad lower. Inflows are still strong into the sector. As the popular media has reported, a lot of money has also been moving into cash replenishing that asset class (as if it needed replenishing!) because a chunk of investors still don’t buy the stock market value. Overall, high yield is +3.5% or so YTD and investment grade around -2.5% for the year.
Banks and finance continued to round off on a few successive weeks of tightening; Goldman paper and JPM paper continued to do well along with assorted bank/finance names. The China slowdown hit commodity names hard and we saw a weakening in that sector. Names that weakened the most included Arcelor Mittal in high yield and Barrick resources and Cliff’s natural in investment grade.
In Gold, the bulls seem to be out after seeing derivative action that suggests being long but effects of China (in slowdown motion) and India (which placed curbs on Gold imports) that constitute the largest retail market have to be factored in.
Investment grade +75 bps over swaps
High yield – 5.875% yield to worst.
Wasn’t it just yesterday – or seemed like – when high yield hit north of 5% returns for the year and then took a pounding on QE taper talk? After all, they had returned better than 15% last year and even without QE talk were perched on a precipice of sorts. Well, after the pounding, high yield is on the march back to almost 5% returns YTD. New issuance is back (over $6 billion last week) and fresh inflows into the asset class. Yields have tightened to 6.5% from the wides and that translates into some 400 bps over the ten year treasury. The momentum seems to be set to continue with new issue calendar still strong.
Investment grade meanwhile is still under water YTD to the tune of 2% and change. With bank earnings looking good, we will see new issuance from these financial entities swell the investment grade pipe.
Bank spreads continued to do well in investment grade land: HSBC, Morgan Stanley etc were in the vanguard of spread tightening. In high yield, Alpha Natural, First Data did well and Advanced Micro lost some ground.
Investment grade +73 bps over swaps
High yield – 5.75% yield to worst.
Where do we go from here? The Fed is determined to grow the economy and housing with any combination of QE and its various tapers and capers. Rising mortgage rates have all but closed the refi pipes and the golden risk-free era of servicers clipping the coupon of the best (credit quality) mortgages is over. Will rising rates start to open the new mortgage lines and thus reduce the credit qualities that mortgage issuers have been leaning towards? Possibly, but rates have risen too fast in mortgages without a smooth transition of the baton from refinancing to first-time mortgages. Thus, it seems that QE taper might be slower and weaker to ease that transition.
Meanwhile, in corporate land, the possible end of low rates is a good thing since most new issuance had been equity friendly and nary for CAPEX, the tail that eventually wags the dog (GDP). This could mean the end of leveraging to spruce up EPS and a harder look at how firms can grow from here in terms of revenue and total enterprise profits. And as Barron’s pointed out, low rates has also cooled the ardor of private equity M&A-ers who look at more expensive financing packages for their eventual capital saviors and thus see a rockier road from here.
In the week past, great earnings from banks and release of reserves saw most bank/finance spreads tighten in the double digits. Better quality assets released reserves to dress up bank earnings. In industrials, Time Warner (TWC) was active with Charter Comm talk of interest in consolidating the enterprises. Sprint also made up lost ground with the surge in high yield and associated news in the name. Radio Shack also was active as the retailer was reported to try and improve its financial structure.
Investment grade +78 bps over swaps
High yield – $101.5 price, 6.375% yield to worst.