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Why did trends diverge for corporate borrowers?

Phalguni Soni

Why did trends diverge for corporate borrowers? (Part 1 of 9)

Primary and secondary markets update for investment-grade (LQD) and high-yield (HYG) debt

Corporate issuance remained strong in the week ended June 27. But debt markets got a jolt around June 25 with the release of the third and final estimate of Q1 GDP and orders for durable goods. Let’s see what you can expect as a result.

Impact of economic releases

On June 25, the Bureau of Economic Analysis (or BEA) released the GDP growth estimate. The BEA revised its forecast for first quarter GDP growth from -1.0% to -2.9% for the first quarter of 2014.

The US Census Bureau also released its durable goods orders report the same day. Orders for durable goods shrank 1% in May. This was a sharp reversal from the 0.8% month-over-month growth reported in April.

In reaction, 30-year Treasury (TLT) yields declined 3 basis points to 3.38% on June 25. In times of economic uncertainty, investors flock to safe haven assets due to increased risk perceptions. This tends to increase prices. As bond prices and yields move in opposite directions, yields on investment-grade debt (AGG) tend to fall.

Volatility increased last week

Volatility is measured by the VIX, or the index commonly known as the “fear factor.” It reached its lowest point in over seven years at 10.61 on June 18. That was the day the Fed’s June FOMC concluded and it released its press statement. The June statement reiterated the Fed’s monetary stimulus stance. This stance will “continue to put downward pressure on longer-term interest rates, support mortgage markets, and make financial conditions more accommodative.”

On June 24, an 18.6% jump in new home sales for May increased the VIX to 12.13. But on June 25, the VIX declined by 4.5% to 11.59 on the below-par economic data and the prospect of lower yields.

The VIX is a weighted average index of put and call options on the S&P 500 Index (SPY). It shows you the volatility you can expect in the S&P 500 Index over the next 30 days.

Corporate debt market reactions

Treasury securities across the yield curve, ranging from 6 months to 30 years, recorded declining yields on June 25. But investment-grade bonds and high yield debt markets both had varied reactions to the releases. We’ll cover these reactions in greater detail in the next parts of this series.

  1. High-yield debt (Parts 2–4)
  2. Investment-grade bonds (Parts 5–7)
  3. Leveraged loans (Parts 8–9)

You’ll also find out other primary and secondary trends for these debt market segments.

Read on to find out about primary market trends in the high-yield market last week.

Continue to Part 2

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