Monthly Archives: September 2013

Credit update September 30, 2013

Amongst traders and watchdogs, a recently-neutered QE-taper talk deftly transitioned to budget showdown talks and the effect on rates and the dollar. The fact that the US will have less than $30 billion if budget ceiling are not raised, caused a wave of new, nay revised, uncertainty and an expected October drama in Washington. 1-year tenors on US CDS spiked to six fold levels last week, reflecting this uncertainty.

Meanwhile, a revitalized Europe seemed to be beckoning investors with fresh waves of good news, mainly stemming from Merkel’s successful election outcome and the ensuing calm that is expected to iron out many wrinkles across the continent from the recession. In other world news, Chinese industrial growth was also strong, delaying talk on the second-largest economy slowing down suddenly anytime soon.

Back on US shores, industrial optimism is running high; the ISM survey is on an upward trend and the expected reading this week is high, pointing to confidence in the sector. In credit news, J.C. Penney did an equity deal to bolster its flagging cash and its fortunes, and the stock traded weaker, along with CDS (traded as wide as +1218 bps on Thursday, according to Reuters – 350 bps or so wider from April this year). Blackberry was another name in the news, as the impending buyout transaction will mean new deals (equity and debt) to finance the purchase and for operating cash.

Have a great week ahead!

Spreads: Investment grade +81 bps over swaps (+2 wider week/week)
High yield – 6% yield to worst (+10 bps wider week over week)

Credit update September 23, 2013

And then there was no QE taper. As the Fed shied away from such an action, stocks and credit breathed a huge sigh of relief. Credit uniformly added close to 1% just this last week, with high yield outperforming investment grade. The QE taper action should be a precursor of more investor confidence and should see more inflows into debt funds and ETFs. Also, many companies will now be encouraged to borrow while rates get a new breather and before new talk of an eventual QE taper start to circulate and gain traction.

At +450 bps or so of spread, high yield is very close to the lows it set (+420 bps) this year. We could reach those lows, if QE tapers are continued to be put on hold for various reasons (employment, weakening housing recovery, etc.) and the economy continues to chug along in crawl-mode, favoring income-producing assets to growth assets. Investment grade, being more rate sensitive, will have a steeper hill to traverse, especially in longer duration assets. Yield curves have steepened, alluding to the possibility of higher inflation amongst other things; that are anathema to fixed income, especially with the low-coupon world of investment grade.

The calendar was strong last week and continued on its trend of strong investor participation. ETFs have seen strong inflows as well.

Have a great week ahead!

Spreads:

Investment grade +79 bps over swaps

High yield – 5.9% yield to worst (30 bps better week over week)

Credit update September 16, 2013

Syrian war cries seemed to die a quick death in a new Russian-brokered chemical weapons pact and that helped markets settle itself into a new, stronger plateau.

Credit markets did uniformly well during the week. In a continuing testament to the strength of the credit market, investors easily absorbed the massive $49 billion Verizon deal (the largest bond deal ever – in credit). In fact, interest went twice as high for the deal (reaching close to $100 billion) before it was priced and allocated. The massive deal completely re-priced the Telecom sector and the paper performed excellently in the secondary as well, with several points of appreciation. Verizon issued 3s, 5s, 7s, 10s, 20s and 30s – impressive in breadth as well as depth. Aside from Verizon, the new issue bench was strong in both high grade and high yield.

In another pointer to soaring investor’s yield appetites, Moody’s reported that covenant quality declined again in August, as issuers can get away with skinnier (or no) covenants that normally protect investors.

Credit has a lot of catching up to do – investment grade is still 4% below water for the year – but with just a few months left into the year, it is doubtful whether the QE taper sell-off can be reversed. Stocks seem to be destined to be the runaway winner for the year as QE taper talk only enhanced the allure of growth stocks, reversing losses in defensive and dividend names.

Have a great week ahead!

Spreads:

Investment grade +77 bps over swaps (5 bp better week/week; negative return -4% YTD)

High yield – 6.2% yield to worst (still positive for the year +3.1%)

 

Credit update September 9, 2013

Syria continues to capture much of the headline news as yays and nays for military action caused increased speculation. The silver lining is that perhaps QE taper will be lightened or even reversed depending on the nature of economic backlash from the war. Other seers have jumped in with similar opinions tied to housing and poor GDP growth.

 

Meanwhile, liquidity in markets continues to be abysmal and generates poor revenues – another broker, Pierpont, exited the market for HY market making.

 

But new issues came back with a bang, after the forced furlough from last week’s shortened attention. The health of the market was apparent; debt-laden Sprint was able to raise $6.5 billion to pay for CAPEX as well as Clearwire’s paper post the acquisition. In related telecom news, Verizon paid much more than expected for Vodafone’s stake in Verizon Wireless. To fund this, a new Verizon deal is expected that will re-price the entire telecom sector.

 

Have a great week ahead!

 

Spreads:

Investment grade +82 bps over swaps (couple better from last week but negative return YTD)

High yield – 6.3% yield to worst (still positive for the year +2.5%)

Credit update September 2, 2013

Happy Labor Day! On that note, a shortened workweek and with diluted interest of participants in the market led to a light issuance week after banner weeks. Only marquee AA and AAA names like EIB, IFC and SEK made the cut, and that too in 3-5 year maturities. High Yield was quiet.

 

Syria of course, captured much of the attention and managed to seesaw the market. As expected, credit dutifully widened in sympathy (see spreads and data below) but I expect the broad investor market is looking at this widening for new entry points – as we have seen numerous times, and that too for more pressing crises.

 

Emerging markets, more so their currencies, continued to get taken to the woodshed, especially as Syria headlines grew in volume and vigor. I expect this also to be short-term; EM balance sheets are in better shape (and tighter fiscal policies) than during previous EM crises, and almost all weakening has been tied to the QE taper talk and the impending flood of money back to US shores. The QE taper talk is but in its 1st inning and whether its unfolding can so negatively affect EM currencies is more speculation than quantitative at this point.

 

 

Spreads:

Investment grade +84 bps over swaps

High yield – 6.25% yield to worst.