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.
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).