The credit markets closed out the month on much better footing then where they began. By April 1, we were just getting underway with social distancing, quarantine, working from home and businesses were shutting down. While we are still under those same situations, there seems to be a light at the end of the tunnel as the country starts to roll out re-opening plans state by state.
While the coronavirus has stabilized and the numbers appear to have plateaued, its effect on the markets, economy and earnings are at the forefront of daily discussions.
April took us on another wild ride as credit spreads compressed and the new issue Investment Grade Credit market priced a record $285.6 billion. We entered the month with the credit markets just beginning to thaw, spreads tightening daily and wild swings in credit and equities that sent the markets trading higher. The demand for secondary credit was mixed as net client selling remained, but the past 7 to 10 trading days or so we have seen a shift that is showing signs of life for client demand.
A combination of the monetary and fiscal stimulus programs have dramatically improved the credit backdrop and opened the floodgates for new supply that led to record breaking weeks and months for new issues.
Hats off to the Federal Reserve for stabilizing the markets and getting credit to flow again and buoy the markets from the record lows we had seen. There remains plenty of work to do as record jobless claims and unemployment will surely reach record levels. How the markets will react to that is the big question.
Credit supply snapshot
Run Rate +85%
|2020 $765.2b||2019 $414.1b|
Largest months by volume
IG credit spreads for April moved in dramatically, tightening 50 to over 100 basis points as we bounced off the lows of late March and tightened in as investors were buying at the wider levels. Last month (roughly March 18 – 24), spreads were as much as 200 – 300 basis points wider in the height of volatility; as the Fed stepped in spreads reversed course and snapped even tighter as we moved into April.
On April 9, we saw a massive tightening trade that saw spreads 25 – 50 basis points in one day, as the Fed programs kicked in to support credit. The massive client selling that we saw in March has subsided this month and was nowhere near the selling pace we saw in March. The CDX Investment Grade Index opened April at 127.8 in from the three month wide level of 154.3, last seen on March 20 and the low of 44 on just February 13.
Early April saw a massive tightening trade take place snapping in to as tight as 83.7 on April 14 and then bounced around to close the month at 87.62, illustrating the volatility we have seen in credit (see chart below).
CDX Investment Grade Index
Bloomberg Barclays US Agg Corporate Avg OAS
IG credit flows for April came in at $607 billion vs in March at $599, vs February at $428 billion, vs January at $457 billion.
Demand for credit in April has dried up much like in March but was not as extreme. Net client selling for April came in at $3.9 billion. Not bad when comparing that to the month prior, which saw net client selling of $17.1 billion – a very stark contrast to January and February which were all net client buying months; February was $677 million net buying and January was $3.9 billion net buying. The bulk of net client selling for April was in the three to seven year part of the curve ($3.9 billion, 12-year and longer $2.3 billion, one to three year $1.9 billion), with the communications, financials, consumer discretionary and energy sectors coming in at $1.52 billion, $1 billion, $1 billion and $950 million, dominating the net client selling. (See IG Credit Flow chart below).
April IG Credit Flows
April Credit Maturity Flows
Investment grade credit closed out April with record new issue flows and tightening spreads, an improving credit backdrop and a light at the end of the tunnel with states beginning to re-open businesses, in addition to the the flatlining of the coronavirus.
The massive swings in the market were unprecedented but the Fed’s programs have done their job and got credit and liquidity flowing again.
April saw stability come back into the markets as the fear trade and lack of liquidity subsided. The long-term effects of the coronavirus are now being debated and dissected as investors and traders try and evaluate the right levels for risk.
Health remains a top concern and as things develop daily with possible coronavirus drugs and vaccines, the markets react to the information daily – but when and how long that will take is unknown. The ramifications of the virus remain a big unknown.
One thing has not changed from last month’s Credit Snapshot, are the market questions; how much longer will this last and when will this end?
As we begin a new month, we are still in a health crisis and we will need further stability to weather the storm and volatility that remains ahead. The credit markets are open and trading, and volatility will remain, but as companies continue to bring new debt to the market and get the financing they need to weather this storm, that brings us one step closer to getting through this crisis; that is a very positive sign.
We cautioned in February’s Credit Snapshot that credit markets would be quick to react to developments from the coronavirus and the treasury market will affect clients buying habits on the curve and could start to hinder investor demand. The markets have weathered the volatility of March and early April and are on much better footing now, but we will need positive news to continue on both the health side and the economic side as states begin to re-open.
We closed out the month on a strong note participating as a co-manager on $6.5 billion two-part deal for Wells Fargo, $2 billion two-part deal for Southwest Air and $1.75 billion deal for Barclays Plc.
April credit markets saw a 100 – 200 basis point swings, tightening spreads and massive and historic new issue supply.
The economic effects of the coronavirus are going to take time to unfold; it will not be seen for months or even years as their effects on the economy and earnings become evident.