High Grade Strategy

Spreads have remained mostly stable despite a pickup in UST volatility. The 10s30s spread curve closed yesterday at 34bp, 2bp tighter than before the UST volatility spike. There was a brief period when curves steepened, driven by some selling of 30yr bonds after significant MTM losses, but this quickly reverted with yield buyers returning to take advantage of the more attractive levels. The reopening trade has played out before re-opening has really begun, with sector dispersion back to a 2 year low. Net supply in the 5 months through February was negative, and the duration of supply has declined too. March issuance is starting strong, however. Pension funding status has improved sharply YTD and from the lows last year, portending more demand for long end credit. Our investors survey this week turned more bullish. Interestingly, and against our view, the bias of results expects steeper credit curves by YE. HG bond trading volumes are up 17% YTD, driven by the divergent trends between nearly stable spreads and sharply higher yields; this is driving significant rebalancing flows across investor types. Month end issuance review and index review summarized. 

Credit Derivatives

We discuss an updated preview of the upcoming CDX S36 index rolls post the recent roll rule changes. We expect the new CDX.IG S36 index series to trade about 7bp wider than the current index series while we expect the CDX.HY S36 index series to trade about 18bp wide/12c cheap relative to the current series. We turn neutral on CDX.IG versus iTraxx Main performance driven by the recent underperformance of CDX.IG and our update roll expectation. We continue to expect the upcoming roll to lead to decompression pressure between CDX.HY and CDX.IG as the spread ratio between the two indices would drop from 5.5x to 5.2x. Furthermore, we believe HG cash spreads would appear stretched relative to CDX.IG post the roll. Demand for Leverage Loan index products has benefitted from the recent increase in rates while short interest in HY index products has increased.