Junk continues to garner interest in the new QE-tapering-talk environment. While investment grade credit (and treasuries) have mostly been in the red for returns YTD, high yield continues to attract interest because of its spread. Its cousin, equities, has also been on a strong trend of late, helping fuel interest in the asset class as providing an additional return over treasuries. In a related news item, Moody’s downgraded the global default rate to 3% in a sign that corporate balance sheets are strong. Of course, the QE-tapering talk and higher rates has led to a large interest in low duration high yield and bank loans (since loans are tied to interest rates and provide a hedge against rising rates).
As a testament to the strength of credit, an impressive array of new issues priced in the market last week, mostly in investment grade: Abbey National, DTE Electric, PNC Bank, Western Union etc. These were mostly in the 5-10 year area as the market clearly was weak for longer duration paper.
This will be an important week for the market, as several economic releases (including GDP revision) and Fed speak dominates. I expect the market to perform sideways unless there are big data points.
Investment grade +78.5 bps over swaps
High yield – 6.125% yield to worst.
A slew of strong economic numbers fueled more chatter on QE tapering and credit markets exhaled away some of last week’s gains. Perhaps this time around, investors are already used to the QE talk and will not be as skittish as before (when stocks sank by more than 5%). Chinese current account data (positive) also gave watchers some pause after Chinese growth had been written off given the new administrations’ reluctance to offer easy liquidity. In related EM news, the appointment of Raghuram Rajan – a former IMF chief economist and a constructive free market thinker – to India’s RBI (Reserve Bank of India) post gave additional cheer to investors expecting broad policy changes to fan growth from moribund levels.
Markets are still strong relatively speaking (inflows still strong) and most of the give-up is asset allocation related (some flows to European Credit from the US following the better news and stability in that region). We saw a strong calendar last week: Venoco, Murphy Oil, BMC in high yield and Procter and Gamble and Shell in investment grade.
Investment grade +75 bps over swaps
High yield – 6.1% yield to worst.
It is almost as if QE taper talk was but a bad dream and more so, a bad dream just to create some short-term opportunity. The stage has been re-set as a low growth environment with little inflation is making investors evaluate their asset allocation – again – after equities got too hot a mention in the press and earnings have been lukewarm at best with market capitalizations being driven by P/E expansion and not revenue or EPS growth. This could be a reason why high yield is getting many of the flows back and is positive returns YTD.
Investment Grade and High Yield returns are almost mirror images of each other for the year thus far (HY is +3.3% and Investment Grade is -3.2%). Interestingly, the spread between the two asset classes still has room to run from the pre-stressed period when the two traded closer to each other.
In individual price action, Edison Mission bonds were tighter as creditors of the commercial power unit were reported to seek more than $1 billion from the parent entity. Gold names like Barrick and Newmont continued to pant for breath in secondary action.
In high yield, ILFC paper suffered from talks stalling from the sale of unit. JCP paper was also weaker from news that CIT refused to finance vendor deliveries.
Investment grade +73 bps over swaps
High yield – 6% yield to worst.