Perhaps we started putting nails into the coffin of the corporate credit market a bit too soon. After last week, characterized by high volatility, modest trading activity with poor liquidity, and minimal new issue supply, both spreads and activity seem to have rebounded. Overall, corporate credit spreads have tightened by about 3 basis points since last week’s sell-off. This is still a far cry from June levels, and about even with the start of the year, but the market overall feels a lot less scary.
One probably should be cautious investing around one’s feelings, though, as they are rarely the best guide in decision making. While improved market sentiment allowed the corporate bond market to re-open, ushering in about $24 billion in supply (compared to $6 billion last week), performance has not been all that great. A lot of the deals we checked are flat to wider since new issue, like Ingersoll Rand’s new ten year bond, which priced at a spread of +135, and is now trading 137/133. Verizon’s new 10 year priced also priced at +135, and is also trading 137/33. Verizon’s 20 year fared even worse, pricing at+ 145, currently trading 150/147. Not as frightening as Lady Madeleine of Usher at the door, to be sure, but not exactly the picture of market strength either.
Last week, on the other hand, very few issuers braved the market, and those that did had to pay up for it, to the benefit of investors willing to step in. JPMorgan issued $2 billion of a 5 year bond last week at +100, and those bonds are now trading 88/84; General Mills priced a 5 year at +80, now trading 77/72. Apparently it is better to buy credit when the market is a little shaky.
This is not exactly a mystery insoluble – the notion that one should buy risk when getting paid to take risk. It is oh-so-hard to implement, however, as we are always tempted to let our bets ride just a little bit longer. Yet when we step back and look at the current market – how far it has come over the past few years, and the level of risk for which we are now being compensated – we are inclined to take less credit risk rather than more. We may still be a little early in declaring the corporate market dead, but it is surely past its prime. One way or another, we think this house will surely fall.