Credit Snapshot | January 2020

New Issue Investment Grade Credit had a very strong start to the new year in January with issuance of $133.7 billion exceeding the monthly consensus of $120 billion. The strong January volume comes in +22.9% over January 2019. Issuers in the U.S. investment grade credit market seem to be looking to get ahead of any risk associated with the Democratic Presidential primaries and the Presidential race as that will be a distraction to the markets and potential issuers. The market continues to see strong demand with buyers gravitating to new debt as well as secondary paper. As we closed out January though, US corporate debt markets were under pressure as equities were extremely volatile for the last week of the month trying to digest the impact of the Coronavirus. The credit market was in good shape heading into the last week of the January but as fears of the Virus continued markets experienced volatility leading to a selloff in spreads while Indices backed off there tight trading levels. The consensus for February New Issues sits at $90–$100 billion and this week we anticipate $15-$20 billion.

Credit Supply Snapshot

IG (ex-SSA)

2020

2019

Run Rate

YTD

$133.7b

$108.8b

+22.9%

IG Credit spreads for the month of January were 7-12 basis points wider with the bulk of this move in the last week and half of the month driven by Coronavirus fears and market volatility. That is a stark contrast to the close of 2019 that saw spreads close out the year 15-20 basis points tighter on strong client demand from investors and a wall of cash chasing US credit assets along with a very quiet New Issue calendar in December.

Investor demand in January remained strong despite the volatility and the global negative yield story still has buyers flocking to the US markets looking for yield in IG credit. The CDX Investment Grade Index closed the month at 50.3 at the MTD high of 50.3. The CDX investment Grade Index has traded as low as 44 on 1/09/20 and high as 55.3 on 10/31/19 in the trailing 3 months. (see Chart Below) The Bloomberg Barclays US Agg Avg Oas closed out the month of January at 102 at the MTD wide level after seeing it trade as tight 93 1/17/20—1/22/20 (Chart Below)

CDX Investment Grade Index

Bloomberg Barclays US Agg Corporate Avg OAS

IG credit flows for the month of January came in at $457 billion vs December at $260.1 billion vs November at $281.5 billion and October at $327.1 billion. Demand for credit in January to open the new year continued and Net Client Buying came in at $3.9 billion (December was $7.3 billion & November was $3.2 billion net). The bulk of net client buying for January was in the 3-7yr part of the curve ($2.4 billion), 0-3yr part of the curve($4.1 billion) with the Financials sector making up 8% of the bulk of Net buying. (See IG Credit Flow chart below)

Investment Grade Credit closed out the month of January with strong volumes, good demand from investors and a robust New Issue calendar. However we closed out the month with volatility surrounding the Coronavirus issues as the market is having difficulty accessing what the impact will be. Credit Indices closed at the near term highs but we continue to see demand for US investment Grade paper from clients despite all the volatility. January projections for New Issues called for $120billion in new supply and we eclipsed that with the bulk of the supply coming in the first next 3 weeks of January. The U.S. investment grade credit markets have had to deal with two major issues to begin the new year, tensions in the Middle East following the airstrike and the Soleimani killing which now seem like a distant memory and the recent Coronavirus risk that have had the markets on heightened alert. Credit markets will be quick to react to further developments with issues in Iran as well as Virus related issues. The one market issues that should begin to weigh on the credit markets is the recent Rate rally the past month that saw the 10yr go from 1.89% on 1/09/20 and closed 1/31/20 at 1.503%, that will effect clients buying habits on the curve and could start to hinder investor demand. There has been a major shift to begin the new year with Net Client buying being so heavily concentrated in the 0-7 year part of the curve and seeing selling in the 7-12 year and also 12 years and longer. We will continue to monitor this closely as February unfolds. (See IG Credit Flow chart above)