Predictably, the weather outside has turned frightful. We’ve been hit by the first real storm of the season with snow, ice, temperatures below zero, higher interest rates….
Okay, if you’re looking at interest rates, this is arguably at least the second storm of the year. But unlike last summer, the Credit markets are taking this winter storm in stride. 10 year government rates are higher by 13 basis points, while excess returns for credit are modestly positive month-to-date. We’ve seen a little weakness in finance, but nothing significant, and a little bit of strength in the industrial sectors. The new issue calendar has remained solid, with over $26 billion in supply for the first week of December, and deals are performing reasonably well.
There were two “AAA” rated issuers in the market this week, which is unusual since there are so few “AAA” rated issuers left. Microsoft brought $3.25 billion across three tranches in the U.S., and about €4 billion in Europe, while Johnson & Johnson brought $3.5 billion across six tranches. Lower quality issuers such as Thermo Fisher ($3.2 billion) and CVS ($4 billion) tended to outperform the AAA deals, suggesting that risk appetite for credit remains in place. One thing we’ve noticed, though, is that risk appetite is different across the yield curve. 30 year deals have outperformed, and shorter deals have also done pretty well, but new issue 10 year bonds have lagged. So if there’s one place where risk appetite is waning in credit, perhaps it’s the belly of the curve.
But for now, owning credit seems like the investment equivalent of sitting next to the fireplace wrapped in a warm blanket. Let it snow, let it snow, let it snow…..