Credit update Aug 26, 2013

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.

 

Spreads:

Investment grade +78.5 bps over swaps

High yield – 6.125% yield to worst.

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