Credit update October 28, 2013

In our last report, we highlighted the performance of credit markets. Well, last week, High Yield officially hit the 6% mark for returns year-to-date; an impressive feat after the mauling the asset class (and credit in general) took after mid-summer when QE taper talk had a runaway effect. What this means – other than the statistical note of 6% returns – is that since High Yield coupons average much less than 6%, the asset class has managed tighter spreads on the year to generate price action and ultimately overshoot its average coupon. This may be difficult to replicate in the months ahead since to begin with, the sector was frothy at the beginning of the year itself and even more so now. Thus, we may be at an inflection point of note. Also, new issues have been covenant-lite or covenant-free and investor protections have been at a low. In summary, it will be interesting to see how much more spread tightening the sector manages going forward – even with favorable demand for high yield debt in mutual funds and ETFs.

 

Some of the movers in credit last week were Financials (Toyota Motor Credit, Lincoln National, Credit Agricole) and Telecom (Verizon, TWC). In High Yield, most names were up, especially Sprint, AK Steel and beaten-down names like Edison Mission and RadioShack.

 

We tire of our notes on new issues but that bandwagon is still rolling merrily, as (still) low rates continue to bring issuers to the table and debt investors are seeking incremental return over treasuries. Bristol Myers Squibb and the World Bank were some of the notable issuers last week, with $7.5 billion between them.

 

Spreads:

Investment grade +72 bps over swaps (unchanged week over week)

High yield – 5.6% yield to worst (-20 bps better week over week)

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