High-grade buyers are herding toward story credits--the names where spreads have widened recently in an event-driven situation. They are moving now because many market professionals believe there is almost a risk-free window in the final weeks of the year. The thinking runs because December is traditionally a slow month on the news front securities trading at wide spreads are bound to come in.
"Investors feel a free pass of sorts to buy riskier, yieldier credits because of the limited amount of news flow," said Edward Marrinan, head of North American investment-grade strategy at J.P. Morgan. "The presidential election has come and gone, third-quarter earnings met expectations and the [Federal Reserve] has spoken. With these issues behind us, the market has room to run," he added.
Recent weeks have been marked by a flurry of investors repositioning portfolios and the trend is likely to continue. Buy- and sell-siders agree there is a strong bid for yieldier credits at the moment, as evidenced by the significant spread compression in names considered story credits. "If it has spread and story, then investors want it for yield or diversification purposes," said one high-grade salesman, noting there has been demand for cross-over credits in recent weeks.
Case in point: the insurance sector was hit hard in late October when New York Attorney General Eliot Spitzer's charges against the industry surfaced. But, as David Havens, executive director and insurance analyst at UBS, points out, spreads have tightened up since then. UBS' insurance index, which includes 10-year paper from 10 on-the-run-names not including brokers, has tightened to 90 basis points over Treasuries from 105bps on Oct. 25 after Spitzer first announced an investigation into Marsh & McLennan. "Two-thirds of the names in the index have subpoenas against them... including Prudential, Hartford Financial Services Group and American International Group," Havens said, noting despite these clouds, spreads have tightened. Still, Havens recommends investors underweight the sector.
Even as the trend continues, a high-grade investor said a couple of credits remain under the radar screen. He named triple-B minus Glencore, a metals and mining company whose 6% of '14s tightened only 15bps to around 255bps over Treasuries after Standard & Poor's removed the credit from credit watch. That's still 10bps wider than its pre-credit watch levels.
To be sure, the trend in nearing its end. Dale Spencer, portfolio manager at Aladdin Capital Management in Stamford, Conn., predicted spreads will likely grind tighter until the end of the year but is ambivalent about performance next year. "It might be the eighth inning of tightening and those credits are the first to go down if something bad happens," he said.