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US investment-grade credit spreads return to pre-COVID levels – risk monitor

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US investment-grade credit spreads return to pre-COVID levels – risk monitor

As far as U.S. investment-grade corporate bonds go, the coronavirus pandemic is as good as over.

The ICE Bank of America investment grade corporate spread narrowed by 2 basis points in the week to Nov. 26 to 116 bps. The spread has now reversed 96% of the widening experienced during March when the implications of the pandemic for U.S. financial markets hit home.

For those looking to make money betting on a further tightening of spreads, there are better opportunities out there, according to Ryan Swift, U.S. bond strategist as BCA Research.

"Value has deteriorated markedly in recent months, particularly for higher-rated investment grade corporates," Swift wrote in a research report. Municipal bonds look more attractive, he said.

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This low-yield world will persist according to Mark Dowding, chief investment officer at BlueBay Asset Management.

"Central bankers are principally concerned by elevated rates of unemployment and closing output gaps at a time when inflation remains well below target in most economies," Dowding said in a market commentary. "This means adding fuel to asset purchases to push yields down and spreads tighter in order to promote accommodative financial conditions, even if the corollary of this is continued asset-price inflation in the near term."

The U.S. high-yield corporate bond spread declined by 15 bps to 433 bps in the week to Nov. 23. The spread has reversed 89.6% of the COVID-19 induced widening.

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Volatility is also gradually draining from the U.S. equities market. The CBOE volatility index, or VIX, eased to 20.8 as of Nov. 27 from 23.7 on Nov. 20. While it remains higher than the sub-20 levels that predominated before the virus struck, the "fear gauge" is down sharply from the pre-election level which peaked at 40.3 on Oct. 28.

"A Biden presidency with a Republican-led Senate likely means more predictable foreign policy and no change in taxation, which implies lower uncertainty and higher corporate earnings," Solita Marcelli, head of CIO Americas at UBS, wrote in a market commentary.

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The emerging market corporate bond spread has been slower to correct than the domestic U.S. markets. The ICE Bank of America index spread was 309 bps as of Nov. 26, down 12 bps from a week earlier, having reversed 84.5% of the March widening.

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The Libor-OIS spread, a key risk indicator for the U.S. banking sector measuring the difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, rose to 12.7 bps on Nov. 27 from 11.7 bps on Nov. 20.

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In the leveraged-loan market, the share of issues priced below 80 cents on the dollar, a closely watched indicator suggesting a company is more likely to default, fell to 3.6% on Nov. 23 down from 3.8% on Nov. 16 and the lowest level since Feb. 25.

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