Stocks struggled largely with the psychological breach of 16,000 on the Dow, and once that was pierced, they happily eased themselves onto a new platform, spurring new debates on corrections and when. Credit was a mirror of such activity and ended the week almost unchanged. Even the 10-yr treasury has largely marked time, hovering around 2.7%. It is true that with long term expectations of 7-8% for US stocks, this year’s 25+% performance has to be diluted with corrections at some point. However, at least from the investment arena, everything looks hunky dory and the bulls are driving the bus. The correction, if it happens in the next six months, has to come from outside the investment arena; as in sabre rattling over Iran or government shutdown etc. In such a case, I would see 10-year treasury rallying closer to the 2s in yield and high yield spreads blowing out to 475-500 bps.
News that filtered out last week and that were material were largely repeat numbers. New reports showed Germany doing better and France slowing, giving deflationary forces new strength. And there were some murmurs that the Fed could cut interest rates on excess reserves, in a new way of signaling easy monetary policy. The hawks vs. doves forces were effectively settled with the Phildelphia Fed Index that came in lower than expected, squashing any taper talk for December.
Investment grade +69 bps over swaps (-1 bp tighter week over week)
High yield – 5.65% yield to worst (unchanged week over week)
What Warren Buffet Sees In Exxon Mobil. Nice depiction of shareholder yield and why Buffett had reason to choose XOM over CVX. CVX is up 18% YTD, trouncing XOM’s 13% (that too, aided by the Buffett disclosure). What else are we missing here?
Credit ended the week mixed; but stocks continued to fly high and set new highs on the heels of the Yellen nomination proceedings that deflated talk of asset bubbles (pun intended). With such dovish statements, and more liquidity expected from Europe (which battles deflation) and along with Chinese plans for new growth, risk seems to be poised to grow; although at these levels, this year’s performance in both stocks and credit will be difficult to repeat. Of interest, therefore, should be leveraged loans that have lagged high yield for the year but offer interest rate protection, lower duration, as well as sit higher up in the capital structure. In months when QE taper talk has been pronounced, they have easily outperformed their cash cousins. In this vein, also of interest, should be good old Treasuries to protect against an exogenous risk. With ten-year treasury trading at close to its wides (2.7%), a portion in it seems to be warranted, with little yield punishment.
Meanwhile, new issuance sounds like a broken record: more than $1 trillion has now been issued in investment-grade credit for the year, in a mirror of last year’s and 2009’s record. And investor memory is short and risk appetite large: Jefferson County of Alabama, of the Chapter 9 fame, is on course to sell almost $2B in debt for its sewer system next week with the warrants expected to get an investment-grade rating.
Also, in investment-grade space, senior debt ratings at Morgan Stanley, Goldman, JPMorgan were cut by a notch at Moody’s reflecting lower support from the US Government going forward.
Investment grade +70 bps over swaps (-3 bp tighter week over week)
High yield – 5.7% yield to worst (+10 bp wider week over week)