It was not that long ago that corporate bonds were trading at spreads not seen in most of our professional careers. Even if the comparable Treasury was yielding 1% to 2%, spreads of 1,000 and 2,000 basis points were very common in the secondary market depending upon the credit ratings. There is more evidence that corporate bonds spreads are coming down. Interestingly enough, there is room for these spreads to tighten further.
This weekend came a report in Barron’s noting that 2009 has quietly and quickly become a great year for junk bonds. Then today, there is a report from Standard & Poor’s showing some of the tightening spreads. The average investment grade with a “AA” rating came in 3 basis points recently to a spread of 257 basis points. The “A” rating spread averaged 332 basis points, and the lowest investment grade of “BBB” came in at 505 basis points.
“Quality” junk bonds sounds like a misnomer, but the spreads compressed an average of 17 basis points there. The “BB” rated average spread was 733 basis points and was 1,026 basis points for the “B” ratings. Down in the junkiest of junk, the “CCC” ratings were said to have an average of over 1,900 basis points.
As far as our belief of there still being an opportunity to see compressing spreads, S&P did note that while spreads were at all-time highs at the end of 2008 it is also true that speculative spreads remain near some of the highest spreads during any default cycle.
S&P noted that these spreads are expected to remain at elevated levels for some time as all market participants tread through the recession.
JON C. OGG
MAY 26, 2009
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