Credit update November 18, 2013

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.

Spreads:

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)

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