Credit Spreads Widened Last Week, but Nothing To See Here

Credit spreads, a broad indicator of corporate bond risk and reward, widened last week, translating into eight basis points of underperformance. Compared to weekly relative performance going back to the year 2000, with a standard deviation of 48 basis points, corporate bonds experienced a mild sell-off. Despite concerns over global growth and the conclusion of the Federal Reserve’s asset purchase program, Kamakura Corporation, a risk management firm, says corporate credit quality is still strong. Looking back to 1990, its Troubled Company Index, which moved down 0.13% last week is still in the 99th percentile, reflecting a smaller proportion of companies having a one-month annualized default probability greater than 1%. Moreover, a JP Morgan bond volatility index indicated last week’s corporate spread widening was within the one month trading range, meaning it was contained. JP Morgan argues the recent increase in corporate bond issuance drove the underperformance. Corporations have issued $106 billion in new bonds in September, exceeding the $89 billion four-year September average (excluding the largest issuer, Verizon). Whatever drove corporate bond spread widening last week seems innocuous, and if the spread widens further we could be looking at a buying opportunity.  
 
Sources: Bank of America Merrill Lynch Corporate Master Index, JPM Credit Research, Kamakura Corporation, Bloomberg