Editor’s letter


As another year goes by, we are naturally drawn to reminisce on those exceptional moments from months past: like Ford’s dramatic reappearance in the unsecured primary debt market – and subsequent credit rating downgrade by S&P – General Motors’ record-breaking jumbo bond deal and the remarkable spread tightening that beat all but the most optimistic of expectations at the beginning of the year.

In fact, the auto sector presented some of the most provocative moments during the year, capped by a dizzying amount of spread compression: yield margins on Ford Motor Credit’s 10-year debt at press time, for example, were quoted over 300bp tighter than where they began the year, according to MarketAxess data. But the question on everybody’s mind is: how low can they go?

Data from Moody’s pegs average Baa spreads at 150bp over Treasuries, in from a whopping 242bp during the second half of last year. How much tighter can those spreads move in? Not by much, says John Lonski, chief economist at Moody’s. During the flush years between 1993 and 1997, that spread had been 125bp over Treasuries, just 25bp inside of the most recent figure.

Even though the evident upside in the credit market has become all the more limited, and the easy money might be a luxury of the past, investors are hanging onto the beacons of hope offered by the favorable technical factors and credit fundamentals in the marketplace. But one might be well served to remember the words often attributed the Greek philosopher Epicurus: do not spoil what you have by desiring what you have not, but remember that what you have now was once among the things you only hoped for.

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