Thanks to high drama in the financial sector, US investment grade supply was lower than anticipated in March.
Although high-grade issuance topped $100 billion for the month, it was by the slimmest of margins. Expectations were for around $150 billion.
Recall that the prior month counted as the heaviest February ever for IG, and 2023 was off to the busiest start on record for high-grade supply.
The acute phase of the worst US banking panic since the GFC briefly closed the new issue door. The market was effectively shut for half a dozen sessions as the world held its breath following SVB’s collapse and amid the hastily arranged UBS-Credit Suisse tie-up.
The situation thawed quickly for IG, and there was some evidence that the junk market might revive too, although ultimately, less than $5 billion in issuance counted as the lowest-volume month since March of 2020.
IG spreads widened materially from March 8 through March 15, but at ~145bps, they’re nowhere near levels that’d worry the Fed, and indeed, total returns were good last month, at around 2%. That was welcome. IG credit was swept up in February’s hawkish maelstrom in the US rates complex. Although spreads were only modestly wider that month, Bloomberg’s IG index dropped some 3%, the largest February decline in data going back almost three decades.
Last year was, of course, the worst year ever for IG credit.
Just like every other asset class, credit has a question mark over it — where things go from here is anyone’s guess. In high-grade, “the fundamentals are sound,” as they say. But the prospect of tighter lending standards going forward as banks struggle with rising costs and margin compression casts a pall.
At the same time, investors are sitting on cash, and for some, IG credit probably looks attractive, although frankly, I’m not sure why you’d take the risk with USD cash proxies still yielding as much as they do.
Both IG and junk funds saw outflows every week since SVB failed.
Globally, high-grade corporate credit is coming off a second consecutive quarterly gain, the best “streak” (I’m not sure two makes a “streak”) since the three-quarter run triggered by the Fed’s decision to support credit markets beginning in Q2 2020.
