As If! Thin Pipeline, Wide Spreads Make For Bogus Fall

As a teenager, in that decade of yore known as the 1980s, I always had mixed feelings about this time of year. Back to school – lame. New clothes – bitchin’! Declining temperatures – bogus. A new season of “Dynasty” – gnarly!

Today, I flat out love autumn. Spring might get all the “rebirth” hype, but autumn too marks a time of new beginnings. Possibly an awesome new beginning, possibly not.

We’ll soon see what my favorite season has in store for the high yield loan and bond markets. But as of this writing, as the first post-Labor Day work week comes to an end--the shadow calendars still look thin, and spreads still look wide. 

The Markit LSCX loan index closed yesterday at Libor plus 405.02, after holding steady above 400 since mid-August. And the Standard & Poor’s U.S. speculative-grade bond spread, which has fluctuated between 775 bps and 796 bps for the past two weeks, tightened some yesterday to 789 bps. By rating category, B and CCC spreads constricted the most, to 846 bps and 1328 bps, respectively. But while tighter than Tuesday’s highs—856 for B, and yet another five-year record of 1335 bps for CCC credits—spreads in both ratings categories sit 30% wider than their 12-month moving averages.

Meanwhile, S&P’s U.S. investment-grade bond spread retracted to 275 bps yesterday, after Tuesday’s sharp widening to 283 bps. Yesterday’s spread is more than 82% wider than the five-year moving average and 35% wider than at the beginning of the year. And with continued pressure on financial institutions and banks, investment-grade credit spreads are expected to remain more or less at current levels.

As for new issues coming down the pike, the high yield bond calendar has one more than it’s had the last few weeks, in other words, one. Clear Channel is expected to price $980 million in bonds early next week. And the leveraged loan pipeline continues to run at a trickle, never completely shutting off the way the bond pipeline has, but far from strong.

I would like to say that, despite all of this, I hold out hope for change in the markets. But I tend to think it will take awhile, and fall probably won’t bring it, at least not on a significant level. Not with the current economy. But while I have little optimism for you on that front, I can offer you this: At least “Entourage” is back. Gnarly.

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