Investment Grade new issue was dominated by bank and finance this week. The primary market saw $26.5 billion in supply, over 50% of which came from financial issuers – and within that, 5 year bank paper was the most popular. USBank, Capital One, Fifth Third Bank, and Suntrust all came to market with 5 year bonds post-earnings. That seemed to put a bit of pressure on financial spreads. Overall, spreads were relatively unchanged all week, but bank names were a touch weaker as accounts were trading positions to make room for supply.
Away from 5 year space, Morgan Stanley had one of the week’s larger transactions, with a $3 billion new issue 10 year bond. It priced at +130, and seemed to be well received, but is now trading a few basis points wide vs new issue levels. Spreads in general gave up some ground on Friday in the face of Russia/Ukraine, heavy supply, and what feels like a real lack of conviction about market direction.
And this brings us to the crux of the matter. Investment Grade credit spreads are trading at their post-crisis tights – still a bit wide compared to pre-crisis levels, but for some very good reasons. We find it hard to support a significant move tighter. On the other hand, spreads remain well-supported by fundamentals, and market appetite has been insatiable. The economy is in solid shape, interest rates are under control, and volatility is low. This period of tight spreads could easily carry on for many months. Going short credit seems like a suicide trade. But it is the dread of something after the spread tightening comes to an end that causes us to raise the question.