Summary:
Investment grade corporates advanced, returning 0.63% for the week. The asset class outperformed similar-duration Treasuries by 3 bps. Spreads tightened slightly, by 3 bps, to 90 bps. Inflows picked up, at $4 billion for the week, though that level remains below the pace seen earlier this year. Meanwhile, supply was somewhat muted at $36 billion. Those deals were met with continued robust demand, with oversubscription rates of 4x on average, leading to new issue concessions of 3.4 bps. That was the below the year-to-date average concession rate for the first time in two weeks.
High yield corporates also gained, returning 0.43%, though the asset class lagged similar-duration Treasuries by 17 bps. Under the surface, lower-rated segments outperformed, with CCCs outperforming BBs for the first time since early February. Senior loans returned 0.10%. While high yield funds enjoyed inflows of $1.1 billion, loan funds saw outflows of -$1.6 billion. Both asset classes saw modest new issuance, with $3.8 and $3.9 billion pricing across high yield and senior loan markets, respectively.
High-grade bond spreads are just 2 basis points wider this month, after spiking in mid-March to a six-month high as US tariffs proliferated and recession fears ripped through markets. Rising demand for limited new issuance has kept credit risk premia below long-term averages for months but spreads tend to flare in economic downturns.
We note JP Morgan’s view issued this week. Corporate bond buyers should be better compensated for stress caused by escalating trade wars, according to JPMorgan Asset Management.
“We just need to be paid a little bit more for the uncertainty risk now in the market,” said Lisa Coleman, the firm’s head of global investment-grade corporate credit. “The tariffs are very uncertain, so we can’t really have a zero probability of recession.” But there are fundamentals and technicals. And the latter has added to spread compression for a number of years now.
