High-Yield Bonds Should Continue to Outperform Moribund Investment-Grade Market
Rise in core CPI stokes inflation fears.
A respectable amount of new issues priced last week as corporations looked to tap the capital markets before the Memorial Day weekend. Typically, Memorial Day marks the beginning of the seasonal summer slowdown; however, according to several sources there remains a relatively heavy new issue shadow calendar looking to price new transactions this week. This shadow calendar is composed of a combination of financing required to fund announced strategic acquisitions as well as opportunistic transactions looking to lock in low-cost long-term debt to fund share repurchases before interest rates rise any further.
While the equity market hit an all-time high, corporate credit spreads in the investment-grade sector continued to trade within a relatively narrow range. Since the beginning of April, the average spread in the Morningstar Corporate Bond Index has varied by only 6 basis points from high to low and ended last week at +135. Since the beginning of the year, the average spread has tightened only 5 basis points. While the investment-grade market has been relatively stagnant, credit spreads in the high-yield market have tightened appreciably. In our first-quarter outlook published late last year, we made our case on why we expected the high-yield market to outperform investment grade this year. Since then, the average spread of the Bank of America High Yield Index has tightened 57 basis points to +447.