Credit traders have no room for error in Dot-Com Bubble Redux

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A growing chorus of analysts warns that high quality corporate debt may have nowhere to go but falling as good quality spreads approach levels last seen in the lead-until the dot-com bubble.

“The best days are behind” for corporate credit, wrote Morgan Stanley strategists, led by Srikanth Sankaran, ahead of the May 16 mid-year outlook. “The combination of extended valuations, less favorable techniques and a slower pace of balance sheet repair suggests that credit markets have moved towards a mid-cycle environment.”

Spreads on BBB-rated bonds, which make up more than half of the high-quality universe, narrowed to an average of 106 basis points against Treasuries on Monday, fueled by investor demand for the part. the lowest rated but the most productive in the asset class. . If spreads exceeded 100 basis points, it would be the first time since the dot-com era of the late 1990s.

Morgan Stanley is calling for a 17 basis point widening for investment grade US bonds through the first half of 2022 and has lowered its credit outlook to neutral.

Meanwhile, Bank of America Corp. expects a further period of rising Treasury yields “to cause the market to price at a much faster rate.”hiking cycle, ”the strategists led by Hans Mikkelsen wrote in a note released on Monday. This will cause spreads to widen in the coming months as investors are pressured to sell or sit on the sidelines.

Still, some say BBBs, the top performing high-quality level of credit this year, could continue to benefit from a favorable wind despite tight spreads. Citigroup Inc. notes that the bailout of President Joe Biden multi-employer’s pensions can stimulate tens of billions of dollars in demand for corporate bonds with the lowest investment ratings.

Morgan Stanley’s bearish outlook for credit overall also favors BBBs due to their slightly higher yields, with expectations that yields will now be driven “by carry and credit selection rather than beta. and capital appreciation ”.

And the duration also plays in favor of the rating compartment. With shorter average maturities than higher-rated corporate debt securities, BBBs are less exposed to losses from rising rates.

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Seven companies are looking to sell new debt in the U.S. investment-grade bond market on Tuesday, including Communications Charter and Microchip technology. Monday’s session saw the start of the week with nearly $ 20 billion in new sales from 10 issuers.

  • Borrowers are increasingly frustrated by the perceived inability of banks to explain their Libor offers transition plans and offers products related to replacement rates.
  • For the first time since January 2020, U.S. bankruptcy courts have seen no major Chapter 11 bankruptcy filing last week.
  • Eric Cole’s Warlander Asset Management will combine with Ellington Management Group as investment firms seek to expand their corporate lending capabilities, according to a letter to investors seen by Bloomberg.
  • For updates to offers, click here for the new issues monitor
  • To learn more, click here to view the Credit Daybook Americas

Europe

A triple-tranche sale of American Tower and the final EU SURE offer led to a busy day for transactions on the European bond market.

  • Credit Suisse Group AG on Monday issued its first euro and pound sterling banknotes since the collapse of Greensill Capital and Archegos Capital Management. While the sales left no doubt about the demand for the bank’s debt, they also highlighted an increase in the bank’s debt. financing costs since March.
  • Calls from lenders for the Carnival, Solera and Vocus term loans took place on Tuesday, while commitments were due for Azelis.

Asia

China Huarong Asset Management Co. transferred funds to repay a A $ 300 million bond maturing Thursday, according to a person familiar with the matter.

  • Yet bad debt manager bondholders may face significant losses, with China planning an overhaul that would hit both domestic and foreign creditors, according to a New York Times report.
  • As the Huarong Saga increases control of the debt of “ bad banks ” around the world, India’s version will keep a tight leash on its own debt financing, according to a senior official at the association who helped finalize the details.
  • Global banks are losing market share in the $ 186 billion loan market to overseas Chinese borrowers, behind local rivals strengthening their presence as the country’s corporate sector recovers from the pandemic.

– With the help of James Crombie



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