And so, after weeks of bluster around the budget / debt ceiling impasse, something did finally give. No political comments here, but we seem to be right back where we started, with just a little breathing room. Nevertheless, with the possibility of an imminent U.S. default off the table, risk markets reacted favorably, and Credit was among them – the index was tighter by 4-5 basis points. This doesn’t seem fair, in some ways. Equities at least traded lower during the uncertainty, before rebounding to new highs. But cash credit spreads have been tightening all along. Lack of supply, continued strong demand – it feels like a very technical market to me right now, but spreads just keep grinding in. Continue reading →

It was another week of waiting for Washington, and there was little movement in time to help credit markets along. It’s not that spreads were especially weak – a few basis points wider until Thursday, and the street seemed happy to engage in any activity that came along. In other words, odd lots traded well. But the new issue calendar was extremely quiet for the second week in a row, and secondary markets seemed to slow to a crawl. Thursday was a little better – word of a potential compromise late in the day helped to push spreads tighter, the rally pretty much in line with equities. But by that time, most new issuers had gone home for the week, ready to take off for a long holiday weekend. Yes, equity friends, the bond markets are closed on Monday in recognition of Columbus Day.

So here’s the recap. There was about $12 billion in Investment Grade supply for the week, with large deals from Sinopec (a Chinese oil refiner), Centrica PLC (the parent company of British Gas), Codelco (copper mining), and our U.S. domestic entry for the week, Berkshire Hathaway. The dominance of foreign issuers was notable – we will assume it is due to earnings season and not because U.S. issuers are busy searching for a more stable political climate to call home.

We are expecting another $10-15 billion in supply next week, but the banks are a bit of a wild card. As we start to move through earnings, we might see some of them hit the market, pushing that supply number higher. A lot will be contingent on progress in Washington – which is starting to feel like waiting for Godot.

It has been a quiet week in Credit. We are coming off of the biggest month ever in terms of supply – September saw almost $150 billion in new issue, which the market readily absorbed. Spreads rallied nicely after the Fed no-action. Even the Street seemed like they were turning just a little more positive, possibly increasing their balance sheet. Then we ran smack into October, and it feels like everyone has gone to sleep. Things usually slow down a little bit this time of year – it’s quarter end, companies are entering their earnings blackout period (during which they can’t issue debt), and portfolio managers start to focus on protecting their performance during the 4^th quarter. This year it feels almost like December, and we are sure that the Government shut-down, rapidly rolling towards the debt ceiling, is a big part of the reason. Nobody wants to place a bet on the political process.

Against that backdrop, few issuers stepped up to the plate this week. Supply was light, with about $15 billion issued in a smattering of new deals. American Honda Finance was the biggest transaction of the week – they printed $2.75 billion in three tranches. This was the Company’s first registered deal (previous transactions were all 144a), so that was pretty exciting. The deal was significantly oversubscribed, and bonds tightened around 10 basis points after the deal freed to trade.

While issuers seem inclined to join the shutdown, buyers on the whole remain pretty content. Spreads have moved mostly sideways this week, and in contrast to the debt ceiling debacle of August 2011, they aren’t showing any signs of stress as we watch the scene in Washington play out. In secondary markets, credit feels pretty well bid, and we think it’s been tougher to get good offers.

In spite of what appears to be a benign environment, it feels to me like we better sleep with one eye open.

Party on, Garth

The Fed’s no-taper surprise on Wednesday sparked a mini-rally in investment grade corporate spreads. Banks, especially some of the higher-beta names, led the way – 10 year paper was 5-20 basis points tighter. Even though equity markets faded the news by Thursday, credit spreads continued to move tighter into the end of the week. The only sector that seems to have stepped aside is Telecom, where spreads of some of the bigger names lagged the overall market. Given the enormous success of Verizon’s record-breaking deal last week (yes, we are still talking about it!) the market is contemplating what other large, transformative deals might be lurking in the wings. While the Verizon bonds continued to perform, other names in the sector showed some nervousness.

On the supply front, we saw about $20 billion in new issue, with a little bit of a skew towards 3-year paper. That looks to us like a pretty average week. As has been typical for the past few months, early price talk on the deals looks attractive, a nice book builds, then the price gets cranked in, and everybody gets cut back. But demand feels pretty solid, and most deals have performed well, so we probably shouldn’t complain. The market is expecting another $15-20 billion next week, which could lead us to the largest month ever in investment grade new issue. At least for now, we are “risk-on” in the credit markets.

Excellent.