Credit had a much better week, pushing month-to-date excess returns solidly into positive territory. Spreads held in even as Treasury bonds sold off following the release of Fed minutes on Wednesday. Supply has continued to be very heavy, with over $33 billion of new investment grade offerings. Deals also seem to be performing better this week than last. For example, Coca-cola Femsa (the largest Coke bottler globally) brought $2,150 million of a 3 part deal; the 10-year tranche priced at a spread of +135, and is trading 10 basis points tighter on the bid side.

The interesting question for us is why? After languishing for two weeks, in the midst of a week where taper fears were re-ignited, and when spreads are already trading at the tight end of their post-crisis range, what is pushing spreads tighter? While it is possible that regular readers of the weekly credit wrap noted that we called the end of the financial crisis a few weeks ago, and are responsible for driving spreads tighter, we think there is more at work here.First, volatility (as measured by VIX) has moved lower, and even with the move higher in rates, credit spreads generally respond favorably to a lower-vol environment.

Second, corporations have been active in tendering for outstanding debt, and this reduces net supply. There have been about $15 billion in tenders so far this quarter, and this provides a nice boost for the market. This week, Mondelez announced an offer to purchase up to $1.5 billion of outstanding high coupon debt, at spreads inside of where bonds were trading.  Companies will engage in tender activity in order to reduce high coupon debt, which will generate a loss in the current year, but reduces interest expense going forward. For total return investors, it is just a gift. You want to pay how much for my bonds? Ummm…okay. We love tenders. And we always will.

Credit had a much better week, pushing month-to-date excess returns solidly into positive territory. Spreads held in even as Treasury bonds sold off following the release of Fed minutes on Wednesday. Supply has continued to be very heavy, with over $33 billion of new investment grade offerings. Deals also seem to be performing better this week than last. For example, Coca-cola Femsa (the largest Coke bottler globally) brought $2,150 million of a 3 part deal; the 10-year tranche priced at a spread of +135, and is trading 10 basis points tighter on the bid side.

The interesting question for us is why? After languishing for two weeks, in the midst of a week where taper fears were re-ignited, and when spreads are already trading at the tight end of their post-crisis range, what is pushing spreads tighter? While it is possible that regular readers of the weekly credit wrap noted that we called the end of the financial crisis a few weeks ago, and are responsible for driving spreads tighter, we think there is more at work here.

First, volatility (as measured by VIX) has moved lower, and even with the move higher in rates, credit spreads generally respond favorably to a lower-vol environment.

Second, corporations have been active in tendering for outstanding debt, and this reduces net supply. There have been about $15 billion in tenders so far this quarter, and this provides a nice boost for the market. This week, Mondelez announced an offer to purchase up to $1.5 billion of outstanding high coupon debt, at spreads inside of where bonds were trading.  Companies will engage in tender activity in order to reduce high coupon debt, which will generate a loss in the current year, but reduces interest expense going forward. For total return investors, it is just a gift. You want to pay how much for my bonds? Ummm…okay. We love tenders. And we always will.