Outlook 2015: Tepid investment-grade bond spreads forecast; spreads close out 2014 soft

By Cristal Cody

Tupelo, Miss., Jan. 2 – High-grade corporate bond spreads ended the year about 10 basis points wider with paper expected to be mixed in the secondary market over 2015, according to traders and informed sources.

BofA Merrill Lynch said in a report that it continues to “look for wider spreads in 2015.”

The Markit CDX North American Investment Grade series 21 index opened in January 2014 at a spread of 62 bps.

The index, which rolled over to series 23 during the year, headed out in December in the 70 bps spread area.

Barclays analysts said in a report that wider spreads in the U.S. investment-grade market versus the European high-grade market and higher volatility in the second half of the year “summarize the credit markets in 2014.”

The energy sector experienced instability late in the year and impacted high-grade energy names, sources said.

“Absent a recession or financial system stress, we expect spreads to tighten modestly from current levels, with the biggest risk to our view coming from the energy sector,” Barclays said in the report.

Marathon Petroleum Corp.’s 3.625% senior notes due 2024 (Baa2/BBB/) traded more than 50 bps wider in late December from where the issue priced in September, according to a market source.

Marathon Petroleum’s 3.625% notes due 2024 were quoted in late December in the secondary market at 184 bps offered.

The company sold $750 million of the notes at a spread of Treasuries plus 125 bps on Sept. 2.

The crude oil refiner is based in Findlay, Ohio.

High-grade bonds mixed

Investment-grade spreads eased 10 bps over 2014, driven largely by the industrials sector, which widened 16 bps, Barclays said.

“Meanwhile, financials widened just 4 bps and utilities widened 9 bps,” according to the Barclays report. “The divergence in financials and industrials performance has continued into 2014, as bank and insurance fundamentals have improved while industrial fundamentals have plateaued.”

High-grade corporate bonds brought at the start of the year are mixed in end-of-year secondary trading, sources said.

General Mills Inc.’s 3.65% notes due 2024 widened 15 bps to 100 bps offered as the year closed, a trader said.

The Minneapolis-based consumer foods products manufacturer sold $500 million of the notes (A3/BBB+/BBB+) on Jan. 21, 2014 at Treasuries plus 85 bps.

Morgan Stanley & Co. Inc.’s 2.5% senior notes due 2019 that priced on Jan. 21, 2014 are ending the year almost 20 bps better, a trader said.

Morgan Stanley’s 2.5% notes due 2019 (Baa2/A-/A-) were quoted in late December at 77 bps offered.

Morgan Stanley sold $2 billion of the notes at a spread of Treasuries plus 95 bps.

The financial services company is based in New York City.

“Bank spreads have widened by 5 bps year to date in 2014, but they have outperformed industrials by 12 bps,” the Barclays analysts said. “We expect banks to tighten by a further 10-15 bps relative to industrials in 2015 because of stronger fundamentals and continued reduction in sector volatility. While we expect senior financial spreads to tighten, we are less constructive on sub debt (issued primarily by banks).”

Long bond demand wanes

Demand for longer-dated financial paper mostly underperformed in 2014 on a rally in 30-year Treasuries, according to the Barclays report.

“Demand for longer-dated bonds is likely to remain weak in the near term, although we expect it to pick up if Treasury yields rise or at least the volatility subsides,” Barclays said.

JPMorgan Chase & Co.’s 4.85% senior notes due 2044 (A3/A/A+) traded more than 30 bps wider than issuance as the year closed, according to a trader.

The notes were quoted at 143 bps offered in late December.

JPMorgan priced $1 billion of the bonds at Treasuries plus 112.5 bps on Jan. 21, 2014.

The financial services company is based in New York City.

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