Credit Spreads Remain Range-Bound

Credit spreads remain range-bound, as the average spread in the Morningstar Corporate Bond Index has only varied 4 basis points during the past three weeks, ending last week at +145 basis points. Interest rates have also been relatively range-bound, as the 10-year Treasury has traded between about 2.50% and 2.70% over the same period. The new issue market was relatively robust for the first week of August, with almost $18 billion worth of deals priced for issuers that Morningstar rates. Otherwise, average daily volume in the secondary market was very muted. We were just as surprised as buy-side investors by the strong volume of new issuance. Among those issuers to regularly frequent the market, new issue concessions were between slim and none, whereas more off-the-run issuers provided some new issue concession. 

One issue that did perform well was issued by  Hospira (HSP) (rating: BBB-, narrow moat). Both the new 7- and 10-year bonds were issued at a +325 spread to Treasuries and tightened up to around +300 by the end of the week, in line with where we estimated fair value in our new issue note published Wednesday morning. We rate Hospira BBB-, one notch higher than Moody's, which rates the company below investment grade. We suspect that the new issue market was front-loaded for the month as issuers and investment bankers decided to hit the markets before vacation season gets in full swing, which should provide a respite for the remainder of August.