Risk Factors Threaten Tight High-Grade Market
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Risk Factors Threaten Tight High-Grade Market

Historically tight investment-grade spreads are facing an increasing array of risks including ballooning oil prices and a rise in shareholder-friendly behavior, noted Edward Marrinan, head of North American investment-grade strategy at J.P. Morgan Securities.

Historically tight investment-grade spreads are facing an increasing array of risks including ballooning oil prices and a rise in shareholder-friendly behavior, noted Edward Marrinan, head of North American investment-grade strategy at J.P. Morgan Securities. Higher rates and an acute threat of terrorism around the upcoming Republican National Convention in New York are also seen as pressures that could force spreads wider. "Given the accumulation of risk factors, not any one of them in particular, one would have to be very optimistic to expect this stability in high-grade credit spreads to continue," he said.

John Tierney, investment-grade credit strategist at Deutsche Bank, agreed that risk factors are increasing. "We've been looking at a lot of risk factors for a long time, the chances of which don't seem so low anymore," he stated. He highlighted potential threats from oil prices and increased pressure from shareholders to pick up capital expenditure spending and to ramp up programs to give cash back to shareholders. But Tierney added that he doesn't see a major blowout happening at this time, short of the economy tanking.

Marrinan pointed to relatively stable spreads despite rising volatility as another indication the high-grade bond party may soon be coming to an end. He said high-grade spreads widened about two basis points in one week earlier this month, even as the VIX, which measures implied volatility of companies in the Standard and Poor's 500 Index and has a high correlation with corporate bond volatility, rose to 19 last week and is poised to increase further. "This is the right kind of environment for a quick change in sentiment. Each new event is putting another straw on the camel's back; risks are layering, not going away," Marrinan stated.

 

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