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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Got to be happy with that

Euro-denominated IG credit spreads (iBoxx index) at B+127bp (-46bp this year already) might actually see B+110bp or lower before 2019 is out. All we need is fear (that it could all come crashing down), hope (that we might be seeing global growth underpinned by those Chinese stimulus measures) and a lot of luck (that event risk remains well off the radar). It looks like we w [...]

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Inflows, demand, reduced primary, illiquidity…. squeeze

Credit bagging performance... It appears as if the Easter holidays are already with us and are acting as limiter on activity after a breakneck start to the year, against the expectations of most. The Dax is up by close on 15%, the S&P a good session's trading away from a fresh record high, just as euro-denominated IG credit sits on returns of almost 3.5% year to date - w [...]

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2016 (or maybe 2017?) all over again

Credit market lapping it up... There are still a couple of weeks in which to get some business done either side of the long Easter weekend break. And chances are that credit Primary ought to be flying, equities will probably edge higher, fuelled by the potential for further eventual policy easing - while discounting a potentially poorer earnings season overall (bank results [...]

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May ‘drags’ on, ECB ‘Draghis’ on

Path of least resistance and all that... Everyone is waiting for something to happen. And that includes the ECB by the looks of it, before it feels that it can act more decisively. The two main developing issues which have us gripped, though, are the Brexit process and the US/China trade tariff talks. There's seemingly little progress or concrete news on either, although the [...]

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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: