Midday Commentary: High-grade bonds hold tight despite bank downgrades; trade sizes fall

By Cristal Cody

Tupelo, Miss., Nov. 15 - Investment-grade bond spreads stayed tighter in early secondary trading on Friday, despite the drop in senior debt ratings of four U.S. banks, according to market sources.

The Markit CDX North American Investment Grade series 21 index closed on Thursday unchanged at a spread of 72 basis points.

"Most credit indices sit at or near the tightest level in 6-7 years after Janet Yellen drove home a belief with investors that the Federal Reserve will err on the side of too much monetary stimulus rather than too little," RBC Capital Markets, LLC analysts said in a note on Friday. "Remarkably the indices continue to hit fresh tights this morning despite Moody's downgrading [four] U.S. financials one notch."

Moody's Investors Service said late Thursday that it dropped Goldman Sachs Group Inc. to Baa1 from A3, Morgan Stanley to Baa2 from Baa1, JPMorgan Chase & Co. to A3 from A2 and the Bank of New York Mellon Corp. to A1 from Aa3 as the agency concluded a financial institutional review that began in August.

Meanwhile, trading sizes in the investment-grade secondary market have dropped in 2013, according to Barclays on Friday.

"The average trade size in the investment-grade market has fallen significantly since the crisis, while the number of trades has grown," Barclays analysts said in a note. "This suggests that market participants are being forced to split large trades into smaller pieces. At the same time, trading volumes are becoming less concentrated, which should partially mitigate the effects of lower liquidity."

The average block trade size has declined 13% to $11.3 million in 2013 from $13 million in 2007, Barclays said.

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