Investment grade credit had a good month – the corporate benchmark was up almost 1.5%, and excess returns were positive by 83 basis points. Interest rates and bond spreads tend to be negatively correlated, so we don’t normally expect a month where both help performance. For October, though, fading expectations for a Fed taper really helped interest rates and riskier assets alike. Financials outperformed on an excess returns basis, as they have all year, and the longer duration the better. Most of the positive performance this month came in the few days after Congress’s debt ceiling deal. Spreads are now more than one standard deviation below their mean for the past 12 months. I can’t say that means they’re overvalued – the range of spreads is getting pretty narrow, and one standard deviation over the past year is just 5 basis points.
What I can say is that we think risk-taking probably ramps up a bit. As mentioned last week, we are entering that phase of the credit cycle. From a credit standpoint, TMT continues to look like the hot spot. (TMT refers to Telecom / Media / Tech. I think that might be a credit-only moniker). Whether it’s a rumor about an AT&T bid for Vodafone or a buyout of Time Warner Cable, the sector continues to come under pressure. Media spreads are wider year-to-date by about 30 basis points, making it one of the few sectors with negative excess returns for the year. Some of the transactions being contemplated actually do seem a little crazy, but it sure feels like there are a few connections just waiting to happen.
Issuers came back to the market this week, bringing about $23 billion in supply. Coca-cola was the biggest, with a $5 billion, 5 tranche deal. KO is one of the few AA-rated issuers left in the market, and their deals are generally well received. Not to be outdone, AA-rated Procter & Gamble brought a $2 billion deal the next day, also well received. On the other end of the spectrum, Altria Group (rated Baa1/BBB) was in the market with $3.2 billion of 10s and 30s. Next week, we are expecting more of the same, with probably $25-30 billion of supply expected. It looks like we are setting up for a pretty ordinary month. Maybe.