Credit update October 21, 2013

Earnings have thus far been decent overall, although spots of weakness have been detected in sectors like retail (see McDonald’s sales miss for instance) or in Defense (Boeing losing orders to Airbus and Govt. shutdown as an example). Earnings season is still in gale force so we will keep an eye out for any large changes in sector strength/weaknesses. Observers are cognizant that the market is a pivotal point in terms of value and the fact that earnings have mostly galloped in response to cost-cutting rather than revenue generation.

 

Last week, as expected, stocks rebounded some 2% after a last-minute agreement in Washington to kick the can down the road or to temporarily relieve the debt ceiling. Credit markets did quite well also, in that wake; for the year, investment grade markets are still a tad under water (-1.5% or so, in returns YTD) but high yield is looking spiffy at +5.25%. Stocks are still the runaway winner, with double digit returns but with credit this frothy this year (even at the start of the year), it would have been difficult for credit to eke out anything but single-digit returns at best. Meanwhile, five-year swap rates (a great proxy for “AA” credit in general) also continues to climb down and is below 1%.

 

In some credit news, Crown Castle is taking over the cell tower business of AT&T. Probably makes sense as the wireless landscape is so competitive that it makes sense for specialization versus vertical integration. Barron’s outlined how AT&T stock now had a healthy dividend rate and ignored by equity investors: happens many times when equity and fixed income have divergent views on the same credit.

 

Spreads:

Investment grade +72 bps over swaps (-5 bps better week over week)

High yield – 5.8% yield to worst (-10 bps better week over week)

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