CreditSights: The Week In Credit
The U.S. corporate bond market has been going so strong for so long that we have come to think of it as being somewhat bulletproof and, given how often January delivers some of the year's best performance, the fact that the market looked sluggish earlier in the week is somewhat disquieting. However, we wouldn't be hitting the panic button quite yet. Coming on the heels of such a stunning outperformance in 2003, the slow grind tighter that we expect out of this year was always going to look lackluster by comparison. And, as last year's performance continued right up until the final month of the year, we did ponder whether the fabled "January effect" was in fact being pulled forward, leaving less pent up demand to ensure a strong start to the new year.
There have certainly been enough bid lists hitting the screens in the first two weeks of 2004 to indicate that some investors have opted to take the money and run. In general the market has had little trouble digesting these and they have traded well even when volume was concentrated into a particular sector such as autos. And, although the supply calendar has maintained a brisk pace, it is within the range of expectations for the month and we have not been deluged with deals in a repeat of January 2003. Rumors of supply in more volatile sectors has the fleet of foot on the hop and not keen to be holding inventory as a new deal comes to market. But this dynamic has repeatedly proven to be transitory.
The market's recent heavy tone seems more of a response to changes in the fundamental picture than the technical one. In the wake of a weaker-than-expected non-farms payroll number for December, the Treasury market has caught a bid, sending 10-year yields nearly 40 basis points lower and back down to the low end of their three-month range. When Treasuries were last at this level, the aggregate corporate index was 18 basis points wider than its current level. Corporates are also being impacted by the activity in other sectors. Emerging markets were caught in the crosshairs this week and were sharply weaker. The new-year equity rally stalled a bit in recent sessions as tech stocks equivocated and equity volatility increased.
There are many reasons why corporates should be seeing some consolidation mode. What is notable is that for much of last year, this would have been water off the proverbial duck's back. Many greater concerns than this stood in front of the corporate road train and got run over for their trouble. This does not lead us to believe that these fundamental developments are inherently more concerning. Current spread moves do signify however, that the Teflon-coated market that we became accustomed to last year does not look to have migrated to 2004. We are back to trading a market that is in step with other asset classes for day-to-day trading volatility.
We view the current modest widening as an opportunity to add exposure to our favored sectors and believe that the overall positive technicals will limit the downside risks, while credit-specific news will still generate an appropriate positive reaction (look to the bid in wireless names on the back of the latest headlines about consolidation in the sector and the positive response to the announcement of the J.P. Morgan / Bank One merger).
