Morning Notes — Sentiment Driven Rally

Credit spreads: High Grade and High Yield credit spreads are narrowing today on improved coronavirus sentiment and the likelihood of an eventual Oil production cut of some kind. From an equity perspective, the narrowing of credit spreads will help reduce volatility. Prior to the coronavirus outbreak and associated lockdowns, High Yield credit spreads hovered around ~300bps. They reached a peak of ~860bps on 3/23 and now down ~45bps to ~729bps. Again, Energy companies dominate High Yield markets, so higher oil prices that follow any Saudi/Russia détente will help narrow the spread.

Bond yields: Global central banks really have only one task at the moment, which is to keep bond yields low…for a while. Today’s higher yields and curve steepening is nice to see, but we expect it will fade. I know there’s people who expect higher yields as record amounts of fiscal stimulus require new bond issuance (higher supply=lower prices/higher yields) but we see these sales being made directly to central banks.

Don’t fight it: US public companies are currently involved in self-help deleveraging (dividend cuts, buyback cuts and reduced M&A activity), while the Fed has joined other central banks by including High Grade credit as QE assets for purchase. Of the many market aphorisms to know, ‘don’t fight the Fed’ should be easiest to understand and apply. High Grade Corporate bonds have policy support and the asset class will be first to recover.