The charts below illustrate how the corporate bond markets have evolved pre/post the crisis years. We do this by looking at several relative value situations between the different sub-sectors of the corporate bond market, as measured by the broad cash Markit iBoxx corporate bond index.
Subtracting senior and non-financial spreads or looking at the difference between investment grade corporate yields (or spreads) and high yield sector yields (or spreads) can give us a good idea as to how the markets are related to each other – and where the current demand is.
We’re by no means suggesting that they will eventually return to their long-term historical relationships (although they might). After all the structure of the products and nature of the markets has altered immeasurably over the past few years. Nonetheless, history can sometimes be a guide.
i) Non-Fin Corps – Senior Fin Index Spreads
We can see from the chart below (recent history) that there has been a major compression between non-financial and senior financial spreads. The new bail-in’able structures of senior debt command a premium versus the old-style plain vanilla obligations and we think that compression between the two might slow while more of this debt is issued.
Nevertheless, it offers an incremental yield/spread pick-up and into the current macro recovery dynamics, we do expect a slow tightening in spreads between this product and non-financial corporate risk.
More for Subscribers:
Buy the dip opportunity
Keep believing, for now... The sell-off in the underlying has presented credit market investors with a near-term buying opportunity. It will keep spreads supported into year-end, although we are likely going to see an impact on total returns in low beta sectors of the credit market. No sweat. Given where the numbers are in credit so far this year, there is enough of a buffer [...]
Record supply meets the demand... There are still six weeks of business left in the market this year, but already IG non-financial corporate bond issuance has set a fresh record. Deals from Apple and Bayer took us zipping past the €285bn record from 2009. And a trio of transactions in a busy high yield primary market made for 2019 being the second-best year for deals in th [...]
Risk markets rediscovering appetite
As trade deal hopes rise... The rallying markets are not getting ahead of themselves - as seen in a more reflective session on Tuesday. Nevertheless, the potential for some kind of a trade deal is the main driver for an improvement in the general tone, and the odds are stacked in favour of something getting done - not least because Trump needs a deal. It might be the only [...]
🗞️ Plain sailing surely, into year end
Pulling in one direction... Now is the time to hang in there and see it out. Markets are rallying, few should be looking to bail. The going is good. November has got off to a fine start and we might just see the risk markets rise throughout the month, before coming to a more measured close through December. It's not plain sailing, there is no macro recovery, not even a wh [...]
ii) High Yield – Investment Grade YieldsThe chart below shows the compression between the high yield and investment grade markets. We’re at record lows. That has come about by the growing confidence in the high yield asset class, the ECB’s deliberate policy of forcing investors down the credit curve as they manipulate the IG markets through their QE operation.
We dare say that this compression probably has legs in it still as the lines between high yield debt and IG debt become more blurred from a measurable perspective (rather than a rating one).