While corporate credit markets are all in a frenzy, some of the more sober traders out there point out the underlying fundamentals are still in good shape.
To look at what's happening with bond spreads right now, you'd think the corporate balance sheet was falling apart and profits were falling through the floor.
From their lows in June, credits spreads on speculative paper have soared 85 basis points, as buyers balk at a mass of new paper from leveraged buyout deals and fears rise of potential corporate credit defaults.
Yet stocks have not reacted much to these rising fears in the corporate credit market. And the result is an historic divergence between stocks and bonds, according to Deutsche Bank. The spread on speculative grade credit has risen sharply, while stocks, except for yesterday, have held their own.
Given this backdrop, let's take a corporate credit-quality quiz.
What happened to the U.S. corporate default rate in June?
a. Rose from 3% to 4%
b. Fell from 1.2% to 1.12%
c. Stayed the same
Which region's corportate default rate is at a 25-year low?
c. Emerging markets
d. All of the above
e. None of the above
Boaz Weinstein, head of credit trading at Deutsche Bank, tells me that he thinks the bond market has overdone it.
He points to the low default rate, relatively healthy profit and strong cash flow. The key is for markets to digest the huge pipeline of deals coming its way, which could take several months.
Ultimately, Weinstein thinks the historic divergence between stocks and bonds will be decided in favor of stocks, because the underlying fundamentals of the corporate balance sheet remain strong.