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:

More for Subscribers:

To Fall or Not to Fall on the Non Call | Bank Capital Insights

Head Scratcher or Mis-priced Hope? Banco Santander (SANTAN) in the end decided not to call their EUR 6.25 Perp 19 AT1 for economic reasons.  This is the first AT1 not to be called and, to some extent, this has come as a surprise to most investors.  However, purely from an issuer perspective, it makes complete sense. Post the non-call, with a reset spread of 541 bps, this [...]

Continue reading

It was just too good a thing

Squeaky bum time, again... Approaching the half way point for the month and we find that credit spreads have performed better than even the most bullish of expectations. OK, there are still almost 11 months to go and the macro risks are building, but we have some good performance in the bag to help alleviate some of the inevitable weakness and/or pain to come. The situation [...]

Continue reading

Grim reaper lurks

Limp credit markets... It's been the limpest of weeks as far as activity has been concerned, although for credit market participants they're at least grateful for the squeeze in spreads which has given some excellent early year performance. We're not buying into the excuse that the earnings season has curtailed primary activity, because only a small proportion of companies a [...]

Continue reading

Special place in Hell? Surely not

Credit on a roll... We are barely six weeks into 2019 and we have an almighty squeeze occurring in spreads in the corporate bond market. Investment grade spreads have tightened 20bp (iBoxx index) while the solid support for the underlying has meant that we have already managed total returns of 1.5%. The high yield market, supposedly going to suffer from the macro slowdown th [...]

Continue reading

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: