IG yields up, HY yields down: It was a contrasting performance as both IG and HY saw spreads rally but IG yields headed higher to 1.46%, from 1.35% last week. In contrast, HY saw its yield stable and dropping to 3.95% (-1bp) as the shorter duration and better spread performance (see below) helped the yield down. In fact, the performance was driven almost exclusively by the triple-C category which saw the yield drop from 11.78% to 11.62% while single-Bs gained just 1bp and double-Bs remained stable.Primary markets slow further: There are no major obstacles to overcome, no blackout periods, no holidays and still issuance volumes remain light and falling. This week we only saw €3.4bn priced across markets, down from €7.66bn last week and €18bn a month ago. In fact, the past three weeks have seen an average of €5.8bn per week, down from an average of €15.8bn per week until the end of April. Most of the activity came from the IG market as most other markets remained quiet and with the ongoing volatility in the sovereign bond markets it is difficult to see issuance volumes improving anytime soon. There are several deals in the pipeline and we suspect that if sovereign bond yields calm down, we’ll see a flurry of activity once again.Too much leverage: The factor which could be undermining the US market is balance sheet leverage. A combination of higher shareholder distributions (through dividends and share buy-backs) and more capex (and particularly inorganic capex, also known as M&A) has increased the amount of debt relative to assets amongst US companies. The chart above shows the average debt to asset level for US issuers in the USD IG index (in dark blue), and the average level for non US issuers in the same index. These non US issuers are typically either European (and therefore represented in the EUR index), or EM issuers (and therefore in the EM index). It’s clear from the chart that US leverage has increased, while leverage outside of the US is still unchanged.Glimpse on Credit Options:Higher risk aversion priced by credit options:We stated in our earlier posts also the implied volatility by credit index options have raised across the board in Europe over the past two months with persistent worries over Greece. The 3-month ATM volatility has increased by 5% for the main from 50% to 55%, 10% for the X-Over from 45% to 55%, +10% for the SnrFin from 59% to 69%. In the US, volatility has slightly increased 2% for the CDX IG from 44% to 46% and has decreased for the HY 5% from 42% to 37%.The volatility skew difference between OTM and ATM volatility is an indicator of the risk aversion implied by the market. A steeper skew means that scenarios of spread widening are priced with a higher probability by the market. The volatility skew difference between 20% OTM and ATM 3 month volatility has increased on credit indices and it is now particularly high for the main and the X-Over: 7% and the IG: 8%, which indicates a higher risk aversion priced by credit option.
The material has been provided by InstaForex Company – www.instaforex.com