Doubtless many readers will be familiar with Mr Market, who was an allegorical figure invented by renowned investor Benjamin Graham. Mr Market swings from pessimism to optimism with alarming and unpredictable frequency.
On Monday morning, Mr Market’s pessimistic personality trait was to the fore. The US Government had failed to approve a badly needed stimulus package and central bank stimulus was seen as insufficient to lift the mood. Mr Market was having a justified case of the Monday blues.
At the beginning of the week, finger in the air estimates on dollar corporate bond supply was around $20bn. As I write this on Thursday evening we have seen $70bn of new supply, which was dwarved by investor demand. Over the last week, we are close to record levels in $ supply.
We don’t have to look far for the reasons behind Mr Market’s apparent schizophrenia, Fed’s QE bazooka and significant fiscal stimulus package agreement in the intervening period goes some way towards an explanation.
The $70bn of supply has been, predominantly, from blue chip entities. At times of stress, these are the only companies able and willing to issue at elevated costs of borrowing. While COVID remains a matter of life and death for us all as individuals, we have a reasonable expectation of these companies living through the current turbulence. Strong balance sheets and a continued need for their products assures us of that.
When blue chip companies such as Procter and Gamble, Kimberly Clark, State Street and Mastercard (among others) are paying generous credit spreads to issue debt, it puts the onus on us to try to look through the challenges of the weeks and months ahead. We therefore added selectively through the supply we have seen this week.