In May, the credit markets were solid, with new issues dominating client activity and spreads closing out the month tighter. 

When the month began, we were in full swing with social distancing, quarantine and uncertainty still surrounding the coronavirus. As May came to an end, we saw a light at the end of the tunnel, with states re-opening and their economies getting back up and running.

The coronavirus and its spread have stabilized, and numbers of cases are coming down daily. Additionally, there is hope for a vaccine in the near future.

We are now scrutinizing its effect on the markets, economy and earnings, which are at the forefront of daily discussions. May saw credit spreads compress and the new issue Investment Grade Credit market priced a record $242.605 billion. Additionally, this month we saw heavy net client selling of $12.243 billion, all in the face of tighter credit spreads.

The monetary and fiscal stimulus programs have greatly impacted the credit backdrop and have opened the floodgates for new supply, that has led to record breaking weeks and months for new issues. 

Still, there remains plenty of work ahead as jobless claims and unemployment are reaching record levels.  Since March 17, 2020, about two and a half months ago, high-grade borrowers have priced more than $750 billion in new issue supply. For context, it took seven and a half months to hit that mark last year. Over $242 billion priced in May, making it the third largest month by volume on record, trailing only the preceding two months; April ($285 billion) and March ($259 billion). The top five largest weeks by volume have all come within this stretch. Sales pierced the $1 trillion threshold on November 4, 2019, more than five months later than this year.

Credit Supply Snapshot

Issuance	IG (ex-SSA)
Stats	Total
May	$242.605B
YTD	$1007.825B

Supply Run Rate

IG Gross (ex-SSA)	YTD
Run rate (as of May 28)	+95%
2020	$1007.825B
2019	$516.9B

Largest Months by Volume

Date	Volume
May 2020	$242.605B
April 2020	$285.6B
March 2020	$259.2B
May 2016	$177.7B
January 2017	$174B
January 2017	$158.1B

IG Credit spreads were tighter by 15-50 basis points, as we tightened in from the massive move last month and bounced around a bit to close out the month of May. Spring has been a roller coaster ride for credit, as spreads were trading at the YTD tights in mid-Feb and then as the coronavirus started to impact the market spreads, pushed out to the wides in mid-to-late March. They went on a full rip tighter in April, that had spreads 50 to 100 basis points tighter and continued to move tighter in May.

The massive client selling that we saw in March has reared its head again and we have seen big broad sweeping selling in May, to the tune of over $12 billion, despite tighter spreads.

The CDX investment Grade Index opened the month of May at 90.95, well in from the three month-wide level of 154.3 last seen on March 20, 2020, and the low of 44 on February 13, 2020, closing out May at 78.1 the month tights. The Bloomberg Barclays U.S. Agg Avg OAS closed out the month of May at 1.74 the tights of the month, the high was 2.13 on May 11, 2020 (see charts below).

CDX Investment Grade Index

Bloomberg Barclays U.S. Agg Corporate Avg OAS

 

In May, IG credit flows came in at $598 billion vs. April at $607 billion, vs. March at $599, vs. February at $428 billion, vs. January at $457 billion.

Demand for credit in May, much like March, was tough; but at least in May, we saw spread tightening vs. March, which saw massive spread volatility. Net client selling for May came in at $12.235 billion, slightly lower than March, which saw net client selling of $17.1 billion; this was well above April numbers which were $3.9 billion of net client selling, and a very  stark contrast to January and February which were all net client buying months; February $677 million net buying and January $3.9 billion net buying. 

The bulk of net client selling for May was in the 3-7 year part of the curve ($4.3 billion, 12yr and longer $4.2 billion, 7-12yr $3.2 billion and 1-3yr $1.6 billion), with financials, industrials, consumer staples and discretionary, health care, energy, technology and communications dominating the net client selling (see IG Credit Flow chart below).

May IG Credit Flows

May IG Credit Maturity Flows

Investment Grade Credit closed out May with record new issue flows, tightening spreads, a solid improving credit backdrop and states re-opening their economies as the coronavirus numbers have not only flattened, but begun to drop.

The massive swings in the market have slowed dramatically and while volatility remains, there is a sense of calm in credit. The Federal Reserve’s programs are working and have credit and liquidity flowing again.

As May saw a tightening and stability in spreads, health remains a concern, but with clinical trials and potential drug and vaccines in the works, things are turning positive. Still, the long term ramifications of the coronavirus remain a big unknown. 

As we kick off June, businesses are re-opening, people are starting to go back to work and hopefully that will help to stabilize the economy and jobs reports.

We cautioned in February’s Credit Snapshot that credit markets would be quick to react to developments from the coronavirus and the treasury market, that will affect client’s buying habits on the curve and could start to hinder investor demand. The markets have weathered the volatility of March and April, stabilizing and turning positive in May, regarding news on both the health side and the economic side. States are re-opening, which continues to bode well for the economy, but challenges remain ahead.  

AmeriVet Securities closed out May on a strong note, participating as a co-manager on a $3.5 billion two-part deal for JP Morgan, $1 billion deal for Bank of America COVID-19 bond, $1.5 billion deal for Citigroup and $642 million structured products deal for Goldman Sachs.  

The COVID-19 deal by Bank of America marks a historic situation in the pricing, as Bank of America became the first U.S. financial institution to exclusively mark proceeds from the bond sale to COVID-19 response efforts. This deal will fund investments addressing social issues related to the pandemic, a trend that is expected to become more active as issuers take advantage of receptive capital markets to respond to the crisis. AmeriVet Securities is honored to be a part of the first COVID-19 financial transaction. 

As we begin June, tensions are rising between China and the U.S. and civil unrest in cities across our country have been rising since Memorial Day weekend.

Spreads will remain volatile and new issues should continue for the next few weeks, as we get closer to summer and a potential slowdown in insurance.  

Stay safe and be well.