Investment Grade Bonds Continue to Support Stocks (Getty)
Investment Grade bonds have been a little weaker of later but remain strong. The North American CDS Index is a good example of that as its spread has widened to 67 from 60 in the middle of June, and from as tight as 45 back in January. So it has widened a little bit, but is still at levels that indicate robust demand for investment grade credit risk. LQDH, an ETF that strips out the interest rate risk of its much larger sibling, LQD (effectively creating a credit spread product) is also weaker than it has been, but at levels that indicate no real concerns about credit risk.
The big factor has been supply – which has put some pressure on credit spreads, but bodes well for stocks
- With $730 billion issued this year, we are only 5% behind last year’s torrid pace.
- The second quarter was 5% ahead of last year’s rate.
- That level of issuance is being done without several companies who issued a lot of debt the past few years, but don’t seem to need to issue yet this year as they benefited from repatriation
With the Investment Grade bond market healthy
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There remains the ability to fund issuance related to M&A – helping support stocks
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Companies can continue to issue debt to fund pension plans cheaply which helps the stock market
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Companies have the ongoing ability to manage debt exposures and take advantage of low overall yields – again, good for companies
There are several reasons that I think the weakness in recent weeks is temporary and should not disrupt the ability of the corporate bond market to support stocks over time
Overall, I’d give the IG bond market a B+ state of health right now, but nothing that a few slower weeks of issuance can’t fix as investors accumulate money for new purchases.
So long as this market remains healthy and open to new issue, there will be support for large cap stocks.
The high yield market is weaker than investment grade, which makes sense to me given the relative credit quality. That could impact smaller cap stocks, but shouldn’t have a meaningful impact on larger cap stocks.
Disclaimer: Any opinions expressed are those of Peter Tchir. This info is for educational and/or entertainment purposes only, so use at your own risk. He’s not a broker-dealer or advisor of any kind.