CreditSights: The Week In Credit
Two weeks ago corporate spreads were beginning to feel as though they had "hit the wall" and hence we prepared for spreads to soften this week as we entered an earnings season that will likely return investor's focus to the ongoing profit challenges that companies face. To date that hasn't happened however, and aggregate spreads have continued to grind tighter amid earnings news that has not been as dire as expected. It's early days yet in the first quarter reporting season but positive surprises are outpacing negative surprises which is only adding to the persistent bid tone in the corporate sector. Activity in the structured market is further adding to the general grab for corporate exposure. The latest update of our BondScore-based aggregate fair value model suggests that current spreads are slightly tighter than would be expected given companies' average credit risk and the other conditions of which the model takes account (these include real treasury rates, the slope of the curve, and swap spreads). But with market conditions being what they are and the technical bid likely to remain with us into the third quarter, it seems too early to call an end to the rally yet. Even the auto original equipment manufacturers managed to deliver enough good news in their earnings releases to enable investors to give them the benefit of the doubt regarding their fundamental challenges at their current wide spreads and they have led the tightening this week. Will this euphoric bid come back to haunt investors? The optimism certainly isn't coming from the economic outlook with yet another batch of data sending dour signals about the state of the economy this week including capacity utilization levels that were just dismal. Investors are clearly banking on a future recovery so keep watching those earnings reports for news on capital expenditure intentions for an indication of just how long we may have to wait.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
