Spread Analytics

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 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.

Recent History:

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Haymaker

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You can’t stop the music

Nobody can stop the music We can probably brush away the impending milestone of -0.30% yield on the 10-year Bund, given that after hitting a record low intraday low of -0.27% it's just a Trump tweet or a skirmish away from it. Something thereabouts is now being dismissed almost as being a normal state of affairs. The worries pile up when we get to -0.50%, while we have a rec [...]

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Time for a breather

Markets anticipating central bank action... As we approach the halfway point for the month, the markets have steadied, albeit comforted knowing that a dose of policy easing is likely coming, and are therefore willing to let the numerous difficult macro/geopolitical developing situations pass. For the moment. Equities generally tread water and government bonds are stable to b [...]

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Game of Bonds

Busy primary keeps credit in focus... Once again there was a strong financial flavour to the primary credit market with an added spice from SSA and covered bond issuance. As for the rest, hopes that the previous session was the start of something brighter was done away with, as all the old fears surfaced and were used as an excuse to explain the ills of the market. Credit [...]

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ii) High Yield – Investment Grade Yields

 The 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).

Recent History: