American credit market outlook

Drug distributors have taken it on the chin this week as the broader market has sold off, but traders are split about how the future looks for these credits, because the market as a whole is fickle now Wholesalers like Cardinal Health Inc and AmerisourceBergen Corp have both weakened over the last five sessions, beyond the rest of the market, as traders have grown a little more concerned about how the profitability of their new business models.
Drug distributors are suffering as pharmaceutical makers have slowed their pace of price increases. Wholesalers are shifting from making their money by buying at lower prices and selling at higher prices, to making their money from fees for distribution.
The fee-for-service model could lower profits, which was a factor that Moody's Investors Service cited late on Friday when cutting its ratings on drug wholesaler McKesson Corp to a step above junk.
The potential risks of a shifting business model have been well known for months, but risks like these seem a little more acute when the broader market is selling off, traders said.
Predicting the future is tricky now, given that corporate credit spreads are at their tightest levels since the late 1990's. Two traders that spoke to Reuters before the McKesson downgrade said the widening this week in the sector was overdone. But one noted that as long as the broader market is selling off, pharmaceutical distributors are likely to sell off as well.
"It's better to just buy or sell an index now," he said.
Portfolio managers still have funds to put to work and have been quiet this week, which means spreads could generally tighten next week, traders said. The market this week was thin, and most trading came from dealers rather than actual customers.
But equally possible is that the market is rationalizing from very rich levels, and could drift to weaker levels in coming sessions before stabilising.
Buying five-year default protection Cardinal Health's debt cost 78 basis points on Friday, or $78,000 a year for every $10 million of principal protected, about 5 basis points wider on the day and 10 basis points wider for the week.
The CDX.NA.IG investment-grade index widened about 4 basis points on the week to 46.5 basis points.