Keeping in mind that the upside to HY (from weighted price to par) is much smaller. At what price does high yield become more about the yield/coupon and less about price appreciation?
The 96 handle price has narrowed the gap while the refi and extend confidence window has been extended by good credit markets and cyclical health. HY 6.3% weighted coupon not too bad. Spreads very tight though. Like most of these liability management drills for corporate treasurers, the borrower need to take a curve and spread view on taking actions subject their bond mix. Seems like that refi game plan should be here soon (for many, now) for the borrower unless they are very confident on how the 2025 fundamentals and UST shape and level will play out.
Spreads are back in the 1997 and 2007 zone under 300 bps, so investors are not looking at great symmetry. Repricing coupons on a refi gives you a fresh look but coupon and yield is likely the main question now for the duration call and the allocation issue for HY vs. IG. I have a hard time seeing how the 10Y comes down much without a trouble trigger at macro level.
A lot of people could get spooked post-election. I see a tariff outcome as pretty threatening to fundamentals and the curve - many don't feel that way. That is a forward looking (into later next year) kind of horizon. I would rather be in IG and medium grade and intermediates if I have to pick one. Most are asset class constrained. Overdue for more decompression in spreads. Pricing like there is a narrow range of outcomes when there is a wide range in my opinion. That means BB and quality B heavy in HY. Extraordinary market with such a front end inversion.
Great insight, many thanks. Do you think the continued credit spread tightening is a reflection of as bonds have broadly sold off this month investors are selling off their most liquid bonds (trsys, etc) making it look like corps are outperforming the market?
It is one of those dynamics in HY bonds where a quick move in UST does not always see the price adjustments right away, so spreads tighten on the UST backup. That can just as easily go the other way on a quick rally in UST and spreads widen. The old school theory is that HY correlates more with equities and IG more with UST. That usually holds in good times. Not so much in sell-offs when BBBs feel it etc.
For now, corps/credit are outperforming on the simple duration factor and they have the extra spread and coupon (in aggregate.) Risk is winning. Credit fundamentals are good. Looking ahead, it comes down to time horizon. If you just sock away HY in a retirement fund, you are clipping coupons riding the spreads and wondering when a dollar price pop might happen on a refi. You can reinvest the coupon or deploy the cash flow (like a lot of pensions do). You are in a spread low now but at a rare dollar price discount for a peak in a market with super low spreads yet not at par. If you think tariffs blow up the market and recession risk and geopolitics cause more turmoil, button up the chin strap.
Keeping in mind that the upside to HY (from weighted price to par) is much smaller. At what price does high yield become more about the yield/coupon and less about price appreciation?
The 96 handle price has narrowed the gap while the refi and extend confidence window has been extended by good credit markets and cyclical health. HY 6.3% weighted coupon not too bad. Spreads very tight though. Like most of these liability management drills for corporate treasurers, the borrower need to take a curve and spread view on taking actions subject their bond mix. Seems like that refi game plan should be here soon (for many, now) for the borrower unless they are very confident on how the 2025 fundamentals and UST shape and level will play out.
Spreads are back in the 1997 and 2007 zone under 300 bps, so investors are not looking at great symmetry. Repricing coupons on a refi gives you a fresh look but coupon and yield is likely the main question now for the duration call and the allocation issue for HY vs. IG. I have a hard time seeing how the 10Y comes down much without a trouble trigger at macro level.
A lot of people could get spooked post-election. I see a tariff outcome as pretty threatening to fundamentals and the curve - many don't feel that way. That is a forward looking (into later next year) kind of horizon. I would rather be in IG and medium grade and intermediates if I have to pick one. Most are asset class constrained. Overdue for more decompression in spreads. Pricing like there is a narrow range of outcomes when there is a wide range in my opinion. That means BB and quality B heavy in HY. Extraordinary market with such a front end inversion.
Great insight, many thanks. Do you think the continued credit spread tightening is a reflection of as bonds have broadly sold off this month investors are selling off their most liquid bonds (trsys, etc) making it look like corps are outperforming the market?
It is one of those dynamics in HY bonds where a quick move in UST does not always see the price adjustments right away, so spreads tighten on the UST backup. That can just as easily go the other way on a quick rally in UST and spreads widen. The old school theory is that HY correlates more with equities and IG more with UST. That usually holds in good times. Not so much in sell-offs when BBBs feel it etc.
For now, corps/credit are outperforming on the simple duration factor and they have the extra spread and coupon (in aggregate.) Risk is winning. Credit fundamentals are good. Looking ahead, it comes down to time horizon. If you just sock away HY in a retirement fund, you are clipping coupons riding the spreads and wondering when a dollar price pop might happen on a refi. You can reinvest the coupon or deploy the cash flow (like a lot of pensions do). You are in a spread low now but at a rare dollar price discount for a peak in a market with super low spreads yet not at par. If you think tariffs blow up the market and recession risk and geopolitics cause more turmoil, button up the chin strap.