Macro forces were back last week to provide new floors for the stock market and credit. The ECB surprised to the upside (for credit) as they cut rates by 25bps and the US jobs report followed in a positive vein as well on Friday. Stocks and Credit did well uniformly except for Thursday when profit-taking and reassessment between sectors and asset classes seemed to take place; with the rate cut, the Euro currency loses some luster (while credit is still favored) and slowing growth in Indonesia continues to highlight near-term weakness in EM vs. developed nations. The main casualty seemed to be Treasuries, as the positive jobs report once again fanned the flames of QE tapering.
High Yield spreads (+425 bps) are now at spitting distance from the lows (+415 bps) but look to continue to tighten past and crack these lows. Default rates are still low and expected to be lower next year, and earnings have continued to deliver good news. High Yield has easily been the best-performing class in credit with 6.25% returns YTD and will continue to do well, save for exogenous shocks and moves to safety (and treasuries).
And as rates continue to threaten to rise, leveraged loans (4.25% returns YTD) will come back to the fore and be a favored sector (along with short-duration high yield), as it provides rate protection.
Investment grade +72 bps over swaps (+1 bp tighter week over week)
High yield – 5.6% yield to worst (mostly unchanged week over week)