In August, the credit markets took over right where they left off in July, with secondary paper dominating client activity and spreads closing tighter for the fourth straight month. The new issue market put up solid numbers and shattered 2017’s August record for new supply, closing out the month with $136.332 billion. In addition, the economy continues to be challenged on a monthly basis as states struggle with opening restaurants, schools and businesses on a very uneven basis.
Credit spreads tightened again and August new issue volume shattered estimates of $50-60 billion. Secondary activity saw net client buying of $715 million, which is a good sign as a heavy new issue calendar in August still allowed cash to chase secondary paper.
Support from the Fed continues to buoy the market as monetary and fiscal stimulus programs have greatly impacted the credit backdrop, giving confidence to fixed income investors to buy credit.
IG (ex-SSA) Total
Supply Run Rate
|IG Gross (ex-SSA)||YTD|
|Run Rate as of Aug 31||+80%|
In August, IG Credit spreads were unchanged to 15 basis points tighter, following a solid spread performance in July. We have seen credit go on a roller coaster ride as spreads traded at the YTD tights in mid-February, then as the coronavirus started to impact the market, spreads pushed out to the wides in mid-to-late March and went on a full rip tighter in April, having spreads 50 to 100 basis points tighter.
The tightening we saw in May, June, July and August has spreads at, or approaching pre-coronavirus levels – and in some case tighter. Despite a solid new issue calendar, August’s spread tightening brought net client buying.
The CDX Investment Grade Index opened August at 69.96 and traded in a tight band trading into 64.8 on August 6 and a wide of 68.2 on August 14, closing the month at 65.55; see the chart below for more information. The Bloomberg Barclays U.S. Agg Avg OAS closed out August at 1.29 just off the tights of the month, 1.24 on August 11 and the high was 1.31 on August 3; see charts below for more information.
CDX Investment Grade Index
Bloomberg Barclays U.S. Agg Corporate Avg OAS
IG credit flows in August came in at $411 billion vs July at $482 billion vs June at $604 billion vs May at $598 billion vs April at $607 billion vs March at $599 billion vs February at $428 billion vs January at $457 billion.
Despite a heavy August new issue calendar demand for credit was solid and came in at $715 million vs $9.303 billion of net client buying in July vs June that came in at $1.601 Billion. The bulk of net client buying in August was in the 1-3yr part of the curve ($2.7 billion), 0-1yr ($2.3 billion) and 3-7yr ($762 million) with 7-12yr and 12-30yr paper seeing net client selling of $4.9 billion.
Financials were the leader in net client buying, with $3.1 billion while Consumer Discretionary and Utilities saw net client buying on a smaller scale. Health care, technology, energy, communications, industrials, materials and consumer staples all saw net client selling. See the IG credit flow chart below for more information.
August IG Credit Flows
August IG Credit Maturity Flows
The month of August saw strong new issue supply, tighter spreads, solid secondary flows and net client buying as a solid credit backdrop continues despite uncertainty in the economy and unemployment. The Federal Reserve’s programs are in full swing and they have pledged to do whatever it takes to keep the economy moving forward.
Spreads are at or approaching pre-coronavirus levels and August saw another month of tightening. While volatility remains in the market, credit continued to have a solid month. August’s new issue volume totaled $136.332 billion blowing away monthly expectations of $50-60 billion. Since March 17, over $1.12 trillion has priced with 2020 supply shattering 2017’s $1.3 trillion record.
As August comes to a close, we are looking forward to a strong new issue calendar for September, with early estimates of $140 billion in new supply. Health concerns surrounding coronavirus and the economy remain at the forefront of daily conversations; with 64 days until the presidential election, we anticipate issuers will try and front load financing in the next 45 days. Spreads should continue to take their cue from unemployment, China and U.S. tensions, coronavirus, jobs data, re-opening the economy and the election.