High-grade corporate deals continue to widen after being priced--even after launching at generous levels--because credit investor risk appetite has begun to wane again. After softer spreads for a few weeks in mid-May, opportunists rushed in and selling surged. But now the pendulum appears to have shifted and investors say they remain neutral, at best, on credit.
One such buyer is Mitch Stapley, portfolio manager at Fifth Third Asset Management in Grand Rapids, Mich. He has been using the heavy calendar of recent weeks to bring his credit allocation up to neutral, but doesn't intend to increase it further. "With some names hitting the market at more attractive levels... we used the opportunity to put some paper back into the portfolio," he explained. He highlighted last week's Prudential Financial deal as an example of a cheap deal. The Prudential '35s were priced at 122 basis points over Treasuries and were bid at 124bps over as BW went to press.
"It's an improved tone in the market, but still a weak one. We're seeing deals trade wider than they came and investors are getting skeptical; deals are less oversubscribed," said one credit strategist at a bulge-bracket firm. He pointed to the Ford Motor Co. three-year paper, which came last week at 330bps over Treasuries and was over 10bps wider by the end of the week, as indicative of growing risk aversion.
While J.P. Morgan's most recent credit client survey showed improved market sentiment, only 20% of the 50 institutional investors surveyed reported a positive outlook on spreads. The survey showed 29% were underweight credit, down from 35% the previous report and 29% were overweight, up from 17%.
Another portfolio manager, who recently upped his allocation to neutral, argued demand for new paper has stalled as investors used the calendar in recent weeks to cover their short positions. "The Street is heavy with bonds. I'm not sure how much of the buying was real money, a lot of it was all short covering with people getting closer to home, to neutral," he commented. The manager highlighted KeyCorp '35s, which came at 150bps over and backed up 10bps as well as Diamond Offshore's switching of its $250 million deal from 30-year maturity to a 10-year deal with a 4.875% coupon as evidence of weak demand. "People don't know what to do about rates; there's definitely a real lack of desire to own long paper," the investor noted.
