As we headed into July 4th, 2013, Investment Grade Corporate Credit did not have a lot of friends. The fear of higher interest rates created all the fireworks, and spurred the market into a flurry of what today looks like a bout of panic selling, which ignited some rather unpleasant spread widening. IG Corps felt a little like a house of cards, one blow from caving in.
We find ourselves in a very different spot today. Spreads are about 50 basis points tighter than a year ago. With the threat of taper now behind us, and the reality of rate hikes somewhere in the future, volatility has remained low and risk-taking has been rewarded. Corporate credit has been one of the market’s star performers, with both spreads and rates rallying, pushing the benchmark up YTD by 5.7%. For us, it was the best July 4th in recent memory, since this was the first June since 2007 that spreads did not widen going into month-end.
The corporate bond market celebrated by taking most of the week off. There was about $18 billion in total new issue, and software provider Oracle was responsible for more than half of the volume, coming to market on the last day of the quarter with a $10 billion transaction spread across 6 tranches. The company will use the proceeds to pre-fund its $4.6 billion acquisition of Micros Systems, a provider of integrated software and hardware solutions for the hospitality and retail industries, as well as for share buybacks and general corporate purposes. Given the size of the transaction, ORCL pricing was attractive across the curve. The ORCL transaction again highlights current market trends around M&A. While we have not seen a significant pick-up in LBO activity, companies are increasingly turning to M&A to boost shareholder returns while taking advantage of attractive levels in the corporate bond market.
IG Corporate performance has so far won out over interest rate fears, M&A risk, slow economic growth – you name it. The sector has shown us all just what it’s worth. While it’s hard to imagine another six months as good as the last, for a brief moment we will just sit back and admire recent history with an ahh…ahh…ahh…