Credit Spreads Remain Range-Bound
We are seeing an increase in idiosyncratic catalysts that are specific to an individual issuer as opposed to industry factors that affect an entire sector.
We are seeing an increase in idiosyncratic catalysts that are specific to an individual issuer as opposed to industry factors that affect an entire sector.
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.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.