Opinion: Return of investor confidence for corporate credit risk

By Roger J Kerr Looking dispassionately at the interest rate levels and yield curve shape today, one could conclude that the upward push in 4 to 10 year swap rates we have seen since March may have been a tad overdone. In their behaviour reflected through market pricing, both borrowers and investors have been correct (in my view) to price term swap rates higher since the overshooting to unsustainable low rates in January/February. However there is now a quite justifiable re-assessment going on as the US Treasury Bond auctions find greater investor support than earlier thought and more recent reports that maybe the amounts to be borrowed by the US Government over coming years may not be as large as earlier forecast. The rally back down to 3.50% from 4.00% in 10-year US Treasury Bonds is not insignificant and reflects greater investor confidence coming back into the debt markets. We have certainly seen investor confidence return to the fixed interest markets with corporate credit spreads being pushed right back to pre-Lehman/September 2008 levels. The chart below of Telecom NZ and Telstra credit default swap pricing underlines the change in sentiment towards corporate credit since March. Those large NZ borrowers who all rushed to the domestic corporate bond market earlier this year appear to have paid "top of the market" pricing for credit spreads. From a borrower's perspective their timing could not have been worse, but fixed interest investors will be happy. Off course the corporate issuers would have got the timing about right in terms of the bottom for the underlying swap market interest rate in January/February. Corporate borrowers who missed the lows in swap rates in January/February should be targeting 5.75% down to 5.50% in the 10-year swaps as a reasonable entry point to fix their debt. This latest pullback in 10-year swap rates from 6.20% is due to the rally down in US 10-year Treasury Bond yields, which drive our long-term market rates.