Credit Check (Records Were Broken)

Credit Check (Records Were Broken)

Q1 2021 was the worst quarter for investment grade credit since Lehman.

Total returns in US high grade took a hit from the backup in Treasury yields, which wreaked varying degrees of havoc across duration-sensitive assets.

Supply was robust, to say the least. Three borrowers tapped the market Wednesday, putting the finishing touches on what ended up being one of the highest-volume first quarters ever for investment grade issuance. March saw around $200 billion in supply (figure below). Outside of 2020 (when issuance was distorted by the Fed backstop and the pandemic) both March and Q1 set issuance records — or at least as far as I can tell.

In junk, borrowers continued to capitalize (figuratively and literally) on near record-low borrowing costs.

High yield supply notched its own quarterly record in Q1. Almost $150 billion in issuance hit the market (figure below). That surpassed even the inflated totals from 2020 when borrowers rushed to take advantage of the Fed’s support for the US credit market amid the crisis.

Tellingly, CCCs have posted a near 4% return so far in 2021, outperforming IG and Treasurys by a country mile. In fact, virtually nothing in fixed income fared better in the first quarter than the junkiest of junk.

If you’re looking for more statistics to underscore the general narrative sketched above, note that LQD bled more than $3.5 billion last month (figure below).

“Bearish wagers against the fund have ballooned,” Bloomberg’s Katherine Greifeld said Thursday, noting that short interest on LQD “currently clocks in at about 14%… below the February peak of 19% [but] well above the nearly 1% level of March 2020.”

Oh, and I’ll toss one more notable out there just for fun. Writing Thursday, BMO’s Daniel Krieter and Daniel Belton noted that “the heavily-rumored rebalancing flows from equities into fixed income appeared in full force [Wednesday], resulting in possibly the largest trading volume in secondary IG market history.”

TRACE reported $41.5 billion in secondary flows, they said. That was the largest ever going back to 2005.


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