Credit spreads have retraced roughly 60% of their widening from this spring and market participants are anticipating no end to the tightening cycle in sight. "It's been a slow process, but investors are buying into the outlook this credit cycle is strong," said John Tierney, investment-grade credit strategist at Deutsche Bank. The tone of corporate earnings has been positive and the economic outlook is robust, he explained.
"There's nothing over the next month to push spreads the other way," Tierney noted, adding he expects any sort of meaningful breakdown to occur later rather than sooner. The only major threat to credit results from LBOs, share-buybacks and the like, agree market participants. "Lightening will strike here or there," Tierney stated, adding the risks are not systemic, but will occur on a company-by-company basis. The J.P. Morgan U.S. Liquid Index (JULI) reached its historic tight on March 9, ex-autos sitting at 24 basis points over Treasuries. After widening to 45bps over on May 18, the index last week tightened to 33bps over.