Longing for Corporates

Longing for Corporates

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In many ways, it’s only fitting that the presumed “Year of the Bond” closed with a dramatic and technically driven spread rally into levels unseen for over two decades. The Long Corporate Index closed 2023 as the 6th best calendar year ever on an excess return basis in the face of recessionary lending standards and restrictive monetary policy. Fundamentals have yet to materially deteriorate as the economy continues to outrun the “recession in 6 months” narrative, but we believe the all-in compensation for risk fails to account for the risks to credit moving forward. Admittedly, we have held this notion on all-in spread risk for a decent chunk of the recent rally and believe it’s prudent to step back to dissect exactly how the Long Corporate market found its way to such tight levels. Even last quarter’s rally in both rates and spreads, Long Corporate Index yields remain two standard deviations above their average for the last decade, which has deterred long end issuance. 1CFOs have been reluctant to lock in the higher yields and shifted funding in on the curve when issuing debt. In many cases, companies simply do not have to issue after terming out their maturities or opportunistically borrowing at record low yields during the Covid period. On the M&A front, some companies are opting to fund deals with equity, and some companies who have historically borrowed to buy back shares have gone quiet. This has amounted to less debt issuance at the aggregate level versus two years ago, and an even smaller portion of debt issuance in the 30-year space.

1 JP Morgan.