Tag Archives: Weekly Credit Wrap

Optimistic Voices

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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…

Dirty Old Town

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The rest of you can celebrate St. Patrick’s Day with your green beer, green bagels, and shiny green plastic hats. I thought it more appropriate to pay brief homage to the Celtic tiger – the economic miracle that visited the country from the mid 1990s until the financial crisis took over in 2008. Popular sentiment holds that the collapse was caused by profligate bankers making poor investments, and lax supervision from regulators which allowed the mal-investment to take place under their very noses. That’s probably true, but the boom that led to the collapse may have been led by Central Bankers more than the lender on the street corner in Dublin, and there may be a lesson there for other problems cropping up around the globe.

Politicians also obviously played a big role. Ireland’s aggressive Foreign Direct Investment policies may have been an important contributor. So successful were the 12.5% corporate tax rate and other development friendly policies that FDI soared to over 26% of GDP. Then capital began to flow out, FDI collapsed, and in 2004-2007, Ireland ran a deficit. At that point, it looks like banks took up the slack, borrowing significantly in wholesale markets, doubling in size – well, you know the rest of the story.

These days, Ireland is on the mend, I guess. It became the first Eurozone country to exit the IMF bailout in December, some degree of economic competitiveness has been restored, and it is at least flirting with growth. I can smell the spring on the smokey wind…

Now we can talk about Credit in the U.S. Supply continued to be heavy, at least at the start of the week. The market saw almost $37 billion in new issue, but over 50% of it came on Monday. By the end of the week, fears over China and the Ukraine finally forced the market to roll over a bit. Spreads were moving wider by the end of the week – in ten-year space we’ll call it +5 or so for the banks, +3-4 for industrials.  Trading in newly issued bonds looks a little sloppy – shorter maturities were trending a little better than long bonds. Overall it looks like the credit curve steepened, but levels were messy.

We’ll see what next week brings – geopolitics has us a little on edge. There’s always something lurking in some dirty old town somewhere…

Flight of Icarus

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The new issue market was on fire this week.

There was nearly $55 billion in total supply, including the quasi sovereign deals. We remember when that was a whole month’s worth of new issue in the Investment Grade Corporate Bond Market.

The amount of supply is all the more surprising in the face of saber-rattling in the Ukraine, though some people think that’s what created the opportunity. Interest rates dipped a little bit, and a lot of companies jumped in. We expected the market to adopt a more cautious tone at the beginning of the week, but that seemed to last for about 45 minutes before we were off and flying. There were three – three­– $4 billion issuers. Mckesson Corp brought $4.1 bill across 5 tranches, Bank of Tokyo – Mitsubishi brought $4 billion across 5 tranches, and Gilead Sciences simplified their issuance with $4 billion across three tranches. Mckesson and Gilead were both funding acquisitions, so had been expected to come to market sooner or later.

It all seems to come back to M&A. The availability of cheap debt to fund shareholder friendly activity is pushing the market along. And we have cheap funding thanks to Central Bankers around the world, which will come to an end eventually – just not yet. Credit spreads were a little shaky this week, mostly on the ever-volatile long end, but it looks like they’ve ended the week pretty much unchanged. That is pretty remarkable performance in the face of that much supply, which generally creates a secondary flow of paper as investors make room for the new deals. So go ahead and strap on your wings.

Fly as high as the sun.

…and the winner is….

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Investment Grade Credit had a really solid week. It might not win best actor in the market, but it turned in a really nice performance, generating total returns of around 70 basis points for the week (our best guess right now, before all the data is in…), and excess returns compared to treasuries of about 8 basis points. The long end was once again the star – for the month of February, long Corporates were up close to 2%, with excess returns of over 1%. Credit overall was up around 1% in February, with excess returns of around 60 basis points.

What’s interesting is that there was a lot going on this week – both on the economic front and the geopolitical front – that could have derailed the market for credit. But after a run of weak data which has been mostly discounted due to weather, we ended up with strong housing numbers and durable goods orders, which helped support spreads. And the saber rattling over the Ukraine seemed enough to keep a lid on rates. Finally, Janet Yellen’s weather-delayed testimony on Thursday seemed to give both rates and risk a bit of a boost. We know she’s not saying anything much different than her predecessor – asset purchases will be reduced at a measured pace, they are continuing with their program, but they will react to any significant change in the outlook. There’s just something soothing about how she says it. Janet Yellen definitely gets our vote for best actress.

The new issue market responded with about $30 billion in supply this week – the biggest week since early January. Cisco was by far the largest issuer, bringing $8 billion across 7 tranches; bonds were well priced, and we think they were among the better performers this week. 3 year bonds did especially well, tighter by 11 basis points, while the 10 year was tighter by 3. Goldman Sachs, Williams Partners, Juniper Networks, Fifth Third Bank, and CMS Energy were all in the market this week, and all performed well, but our vote for best supporting actor goes to Cisco based on the sheer audacity of their performance.

Next week we are expecting to see another $20 billion in supply; that number may go higher if this week’s drama has a happy ending.  And for best screenplay, the winner is…

Get Lucky

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The news in credit this week was dominated by the merger announcement between Comcast and Time Warner Cable – just in time for Valentine’s Day. Time Warner Cable bonds took a big hit last June, with spreads widening by about 150 basis points in response to romantic overtures from John Malone at Charter communications. Prices of TWC’s long bonds dropped by about 15-20 points, and have been languishing ever since on fears that Malone would prevail, and the company would lose its investment grade ratings. Comcast was an on-again, off-again suitor in this ménage a trois, and we wondered if they would ever take the relationship seriously. For credit investors who held onto, or took positions in TWC bonds during this drawn-out courtship, they finally got lucky. Immediately following the announcement of the all-stock deal, TWC bond spreads gapped about 125 basis points tighter, and the long bonds soared about 15 points. Not a bad one-day return for investment grade credit. One of the factors driving the deal seemed to be the desire on the part of management to pursue an all stock transaction, as it would help bondholders as well as stockholders. As creditors, we just aren’t used to seeing that kind of love.

Credit investors who held on during the January-end Emerging Market anxiety attack also got lucky, as spreads have tightened over the past week almost to the levels we saw before the mini-risk flare. Month-to-date excess returns are positive, and the long end is once again leading the way. We think part of the spread movement in secondary paper has been driven by a relatively light calendar, as the weather (and New York City weather in particular) continues to play an outsized role in our market. Taking out the Sovereign issuers, we were left with just $14 billion in supply, dominated by the bank sector with $4.25 of 3 year fixed and floaters out of JPMorgan, $2.75 billion 3 year floaters and 5 year fixed from Barclays, $1.75 billion 3 year fixed and floaters from Bank of America, and $2 billion from Cap One across 3 shorter duration tranches. If you did not want to buy short bank paper, you were definitely out of luck in new issue this week. Next week is looking better though – at this point there may be some pent-up supply, so we’re counting on at least $20 billion. If you’re willing to wait, you could get lucky.