Summary:
Figure 1:US Investment Grade Bonds Effective Yields Figure 2: US Investment Grade Bonds OAS Spreads.
The above goes to a point that we have been making for some time, namely that US corporate debt is proving less volatile than the US treasuries market, or at least at the longer end. Of course, US treasuries do not have default risk. Corporate debt does.On the flip side, regarding spreads, on a fundamental basis there is no doubt that spreads are tighter than they should be. For example, for B-rated HY at circa 350 bps, that equates to a forward implied default rate of about 3.5% when the trailing 12-month default rate is closer to 4.5%. However, it is the technicals, with a structural excess demand and particularly in the HY market. And that does not look like changing anytime soon. For example, looking at the bond auctions this week in both the US and Europe, all issuance of note was characterised by very significant oversubscription. And this comes in a week that, for example, in Europe was the biggest on record.
As we noted last week, there is a mountain of money going into new issuance. In recent weeks, US and European companies have raced to issue debt looking to seize on the risk on mood in markets (up until Wednesday 21 May, at least) after the easing of US and China trade tensions.
