Investment Grade Credit finished the first quarter on a strong note, with spreads moving decidedly tighter during the last 2 weeks of March, generating total returns of nearly 3% for the quarter. With a few hours to go, that’s about 100 basis points better than the Barclay’s Agg, 135 basis points better than Mortgages alone, and 120 basis points ahead of the S&P 500. It’s even a little ahead of High Yield. IG returns were helped by both spread tightening and lower interest rates – definitely not the consensus call to start the year. It almost feels like we’re back in the Greenspan Goldilocks Economy.  Modest economic growth, reduced leverage, good equity returns, rising home prices…the domestic economy is almost like being in a fairy tale right now. Greenspans’s Goldilocks, meet Bernanke’s Dorothy. We’re out of the woods, we’re out of the dark, we’re out of the night….

Of course, the porridge is a lot sweeter this time around. We’ve had zero interest rates for five years now, while Goldilocks was only treated to 1% rates for about 9 months. With tapering firmly on its way and the first rate hikes seemingly just around the corner, will the exit for Dorothy be as smooth? Can we look forward to 3 years of low volatility and stable spreads? Step into the sun, step into the light….

Or will this turn out to be a horse of a different color? Is the whole market so addicted to sugar in its porridge that we go into insulin shock without it?

Maybe that’s a little dramatic. It certainly seems so right now. In addition to solid returns, low volatility and tighter spreads, supply has also been extraordinary, and a pretty good indicator of how eager everyone is to purchase IG Credit. We had the busiest March on record at over $110 billion, and supply for the quarter was up 15% from 2013 – both in a year when supply has been widely anticipated to move down for the full year by as much as 15%.

We’re inclined to stay on the yellow brick road for now. We know how risky it can be to follow a different path. March up to the gate and bid it open…

Open…