As we and countless others have documented extensively, the resiliency of credit (manifested in a steadfast refusal to sell off in the face of all manner of negative catalysts that should, all else equal, have led to wider spreads), has been nothing short of remarkable.
Both IG and HY have had a one-way ticket tighter since the deflationary doldrums of early 2016 and the ranges have been so narrow that you’d be forgiven for thinking no one was even manning the desks.
When you consider that this has come against a backdrop of unprecedented political upheaval, episodic bouts of commodities carnage, and a generalized sense of geopolitical angst, credit’s Teflon character is even more impressive.
Of course lurking behind the facade of stability/complacency is the central bank liquidity backstop. Want to know why spreads never seem to blow out? No problem, have a look at this chart from Citi:
Any questions? Well just in case there are (still questions, that is), allow BofAML to explain:
So, it’s very clear what the biggest risk to credit markets is going forward, right?
And SocGen is going to explain as much in the context of € credit’s surprisingly strong performance during a week in which DM bond yields spiked hard on hawkish central bank rhetoric (note, this is an assessment of € credit but remember, central bank liquidity does not exist/flow in a geographic vacuum)…
Oil can be disruptive, but it’s Central Banks (ECB QE) that hold the key
This week the market interpreted comments by Draghi and Yellen and Carney to mean a tightening policy and very quickly sovereign bonds sold-off aggressively like our rates colleagues point out. Bonds tried to recover after the ECB noted that the market misjudged Draghi’s comments, but higher-than-expected inflation figures and an overall hawkish tone pushed bonds down again. The moves were a taste of what is likely to happen once the ECB announces a further QE reduction. Credit did not react however and spreads continued to rally amid heavy issuance volumes. Oil can be an issue this summer if prices fall below $40/bbl, but we are more worried about an eventual announcement of a further QE reduction. If neither happens, we expect credit to remain solid with higher beta sectors outperforming.
Issuance market shows appetite for credit remains very strong: Issuance activity is ending the month in style with overall volumes at €60bn, the best total for June since 2007. Furthermore, overall volumes are now €30bn ahead of last year’s tally for 1H and IG is €17bn ahead of last year’s figures. And this week was particularly strong, despite the aggressive volatility in the sovereign bond world. Clearly, there’s great appetite for the asset class, although CSPP continues to distort some numbers.
US market update — A solid performance into the earnings season: US credit had a positive performance, in line with EUR IG and we expect spread to remain resilient and even tighten gently in the next couple of weeks ahead of the earnings season.