US investment grade credit derivatives spreads moved wider this week, but they are still in from this year's widest level and may even be benefiting, at least in part, from the recent trend away from riskier assets.
"While Treasuries have got the bulk of the flight to quality, certainly investment grade credit has also from high yield and from equity investors," said Ira Jersey, US credit strategist at Credit Suisse in New York.
Stocks and riskier assets such as high yield debt have sold off over the past month on concerns about how rising interest rates may impact economic growth. Credit derivatives have widened in synch with weak stock markets, and on uncertainty over whether the Federal Reserve will continue raising rates.
However, "corporate credit equality remains very strong and the question now is more of an earnings issue rather than actual credit fundamentals deteriorating, which they haven't done in a significant way yet," Jersey said. "Until that happens spreads will be measurably maintained."
Investment grade and high yield credit derivative indices have moderately outperformed the weak equity market, while other indices including the crossover index have significantly outperformed, J.P. Morgan analyst Eric Beinstein wrote on Friday in a report.
The Russell 2000 is the most correlated equity index to the credit derivative index products, and the investment grade, high volatility, crossover and high yield have all outperformed the Russell when compared to the six-month, 12-month and two-year historical patterns, Beinstein said.
The investment grade credit derivative index was little changed at about 43.75 basis points on Friday, after reaching as wide as 44.75 basis points on Thursday in intraday trading. The index is off its tightest level of the year of 34 basis points on May 2, however in from its wide of 46.5 basis points in January.
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