The primary market has not been the avenue for quick spread-tightening that it was in the spring of last year, when the Bloomberg Barclays U.S. Investment Grade Credit Index was at 200 basis points. Attractive valuations combined with the Federal Reserve’s corporate purchase program made credit spreads, in general, a one-way train tighter. While not all deals were pricing with concessions, outright spread and yield levels were attractive and provided sufficient cushion for eventual strong performance from new issues.
This year has been different. With most countries coming out of lockdowns and rolling out vaccine programs, credit spreads are pricing in a recovery. IG credit spreads have been relatively range-bound thus far and are unchanged over the last month, with the credit index’s OAS near 80 bps. Additionally, volatility in credit spreads (based on the 30-day moving average standard deviation of the Bloomberg Barclays U.S. IG credit index OAS) is at its lowest levels since 2017. Tight spreads and low volatility typically create a more challenging environment for meaningful performance in the primary market. As we’d expect, overall performance of new issues has been mostly in line with the broader market. However, despite spreads hitting post-Global Financial Crisis tights, there are still opportunities in the primary market.
In our view, at current spread levels, wider trading issuers and higher-beta sectors have the most room to compress. However, new issue outperformance has not been limited to a single sector, rating or maturity. For example, we saw outperformance in some high-beta financials and high-quality consumer cyclicals and saw underperformance in other wider-trading financials and BBB technology names. While we expect new issuance to slow in the second half of 2021, opportunities will likely continue to exist in the primary market; but at relatively tight spread levels, those opportunities could be more selective and focused in the higher-volatility sectors.