Corporate Bonds

Includes: AAPL, AGG, IEF
by: John Jansen

Corporate bond spreads are opening unchanged to a basis point better today in most sectors. Issuance has subsided into quarter end and will regain some momentum when the calendar announces the cruelest month, April. One salesman with whom I regularly converse was noting what he decried as the dysfunction of the single name credit curve market. What do I mean?

Apple (NASDAQ:AAPL) issued a 10 year note last spring just before rates cratered 100 basis points. The 10 year priced at T+75. When the market collapsed spreads widened and that bond traded into the low 90s. Yesterday that bond traded at +57 to 10s. The Apple deal in which the previously mentioned 10 year was sold was a multi-tranche deal and also contained a 30 year bond. That bond has barely budged and trades at +100 to the Treasury. My source notes the out performance of the 10 year Apple bond and what he believes is a distorted credit curve. He thinks that the source of the dysfunction is the Federal Reserve as there is still an outsized and insatiable bid for credit in the 4 year through 8 year sector which then drags along the 10 year sector. This source and long time friend was on vacation last week and he thought that the change in sentiment regarding Fed policy would have tempered demand. He tells me that in there morning meetings of the various regional offices of his firm buyers abound and swamp the sellers.

So while the Treasury market reflects a significant sentiment change with the flattening of the curve post Yellen, that mindset has not yet percolated over to the corporate bond market. I do believe that when this end there will be weeping and gnashing of teeth in spread product land as investors own spread product and not Treasuries. So someday there will be a huge flushing sound taking those positions down. However, that is not happening yet and probably does not happen until the FOMC is about to raise rates or actually begins the process.