Corporate bond supply has trailed off to almost nothing. This week we had just $6 billion in new issue, about a quarter of which was from Credit Suisse, as the banks come back into the market post earnings. Credit Suisse reopened two existing bonds, selling an additional $750mm each of the 2.3% 5/28/19 and the 1.375% 5/26/17 at spreads of +70 and +47, respectively. There was just $65 billion in corporate bonds issued all month, and this week’s supply came to an abrupt halt with the equity market sell-off on the last day of the month.

Spreads overall were weaker, backing up 2-5 basis points. Banks and higher risk sectors bore the brunt of it, but weakness was pretty widespread. For the month of July, spreads ended up close to unchanged, and total returns were pretty close to zero – a far cry from the 5.7% for the first 6 months of the year.

We are keeping a close eye on Supply / demand trends in credit right now. We have watched the high yield market suffer significant outflows for most of July, creating selling pressure and driving total returns to -1.33% for the month. We have not seen the same selling pressure in high grade markets, where money continues to come in, but we are wary. The risk-on tone which blanketed the markets through June has given way under the weight of geopolitical pressures, economic uncertainty, and the expectation that higher interest rates are finally right around the corner.

We can’t help but feel that the river of liquidity that has been carrying us all downriver is about to dump us into the Gulf of Mexico. Being carried out to sea on a riverboat would be a vastly different end to the credit cycle than anything we’ve seen before. Everyone is so busy waiting for the river to dry up – the more typical end to the cycle – that perhaps they are missing the bigger risk. As the Fed ends QE, and moves into rate hikes, maybe we will find that shutting off the tap is harder than they thought.