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:
Fragile trade truce get us off to a weak start... It looks like markets had gotten ahead of themselves. The hopes of a Brexit deal are looking more precarious again, with the EU once again reportedly playing hardball. The potential for a US/China 'limited' trade deal has underwhelmed so far, but at least we might have something which might help calm the tensions. But the [...]
Tunnel of love
Green light and it's a go... In a flash, the tone is massively upbeat. Trade tariff talks have apparently gone well between the US and China and we are in de-escalation territory. Meanwhile, we have the makings of a deal on Brexit and markets rallied hard into the final session of last week as a result. Should the positive tone follow through into some sort of reality of [...]
Signs of progress
But too much to juggle... We're not out of the woods in any way but we have let some much needed steam out of the pressure cooker. Trade talks/Hong Kong/Middle East/Brexit/macro were all beginning to get too much and were clearly weighing on markets. So some of the heat has been let out courtesy of - or hope that we will see - some sort of breakthrough (a partial deal?) on t [...]
Boris’ Karloff moment
Now we're talking... The focus totally should have been CK Hutchison Telecom's six-part deal, with investors scrambling to get hold of the company's debt even as Hong Kong's troubles show no sign of abating - but markets were stumped. By Brexit. The latest had the markets in a tizzy as talks were said to have broken down (or close to breaking down) amid an apparently terse p [...]
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).