For the past several Decembers, Investment grade corporate bonds showered investors with positive excess returns. Strong demand met reduced new issue supply, and the resulting yield grab left us all feasting on performance. This year, though, it looks like credit spreads have been climbing the slopes of Mount Crumpit.  Over the past six months, they have gone from around 100 basis points, to about 135, and it’s hard to say whether we’re anywhere near the peak.

Supply has not helped the situation. The market stands at a record $1.2 trillion year-to-date, and Mega deals have hit the market throughout the fourth quarter – Medtronic with $17 billion, Alibaba with $8 billion, Kinder Morgan over $7.5 billion, Becton Dickinson over $6 billion….the list goes on. Most of these performed well (at least initially, on growing concessions) but they have also put a lot of pressure on the market overall as investors try to raise liquidity to participate in increasingly attractively priced new issue. These transactions have, by and large, funded significant re-leveraging activity – whether for M&A, share buybacks, or other capital structure engineering.

KMI and BABA have been notable laggards, particularly over the last couple of weeks. They are most exposed to two of the market’s biggest fears: oil and China. Oil prices below $60 seems finally to have grabbed the attention of the equity markets, which have been shrugging off the mixed-message-indicator since October’s sell-off.  How equities feel about China is harder to say, but the Chinese have not been at all concerned, at least judging by the CSI 300, up about 35% for the year.

We in the credit markets are not so sanguine. While little Cindy-Lou Who of the equity world lies a-snooze in her bed, we know perfectly well that the Grinch is slinking around the Christmas tree snatching up a year’s worth of presents. As excess returns slip away, we just hope that we’re left with a can of who-hash.