The recent surge in corporate bond issuance could fuel the return of liquidity to the high-grade corporate bond market, where trading volumes have dried up and bid/offer spreads remained wide for months. Last week saw around $10.2 billion in new corporate paper from 31 issuers on Tuesday and Wednesday alone in the strongest week of issuance since General Motors warned of its earnings miss in March, according to Moody's Investors Service. This compares to the month following GM's warning, when not a single day had more than $2 billion of new paper sold.
"Good secondary market performance of new issues could break the logjam," said Ed Marrinan, head of North American high-grade strategy at J.P. Morgan. He expects the new issue calendar will remain robust through June.
One high-grade portfolio manager, who has been underweight credit, said the good performance of new issuance last week signaled investors may be starting to put money back to work. He highlighted Mexican retailer Controladora Comercial Mexicana's $200 million of 6.625% notes--which came Tuesday at 262.5 basis points over Treasuries and tightened over 30bps the same day--as evidence investors are more comfortable with risk.
Marrinan pointed to recent tightening in the Dow Jones CDX, which he said is a good leading indicator of investor risk appetites, as signaling investors will start to deploy cash. "I expect to see some re-tracement of widening in the next few weeks, I'm more optimistic than I've been in a while," he added.
Morgan's credit client survey from two weeks ago showed investors' outlooks were at their all-time worst, with 35% expecting spreads to widen and 35% underweight credit (BW, 5/23). Earlier this spring, sell-siders at several desks estimated corporate bond trading volumes were down at least 30% as the buy-side stockpiled cash (BW, 4/18).
To be sure, not all credit players are as optimistic. "While liquidity has improved a little, it's still not great and bid/ask spreads have remained wide due to news items," stated Sai Choy, portfolio manager at Fischer Francis Trees & Watts in New York, referring to Japanese bank UFJ Holdings' payment suspension last week. With Fitch Ratings' downgrade of General Motors to junk last week, the manager said the autos have been somewhat resolved, but his concerns regarding Federal Reserve tightening, LBO action, shareholder initiatives and rising inflation remain. "The steadier new issuance is a positive...but I think the market will continue to stay whippy," he said.