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)

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