(Bloomberg) -- U.S. credit markets are finally thawing.
The high-yield market saw its first new issue in six weeks on Thursday, the same day that investors poured in nearly $40 billion of orders for a bond offering from AB Inbev. And leveraged loan outflows are abating, helping prices recover across the board as investors regain confidence that the economic expansion has more room to run.
“There’s definitely been a change in tone, and it’s definitely risk on,” said Matt Kennedy, a high-yield portfolio manager at Angel Oak Capital Advisors. “This reversal has reinstilled some of the confidence the market had prior to October that the expansion can continue.”
The credit carnage in the last quarter of 2018 is reversing as the Federal Reserve seeks to reassure markets that its hiking cycle is not on autopilot. At the same time, cheaper valuations have provided decent buying opportunities. While investors still maintain longer-term fears about economic growth and trade tensions, the near-term weakness warrants taking exposure at the margins, several Wall Street strategists said this week.
The change in sentiment has been especially encouraging for new issuance. Targa Resources Corp. on Thursday ended the drought in the high-yield market in stunning fashion, drawing in enough demand to double the size of its offering to $1.5 billion. Anheuser-Busch InBev NV drew in orders quadruple the amount it initially sought to borrow, allowing the world’s largest beer brewer to up the size of its offering to $15.5 billion. Banks are seizing the opportunity to offload risky corporate loans that they were unable to sell in December, enticing buyers with discounts and better terms.
The rally has some strategists wondering how long it might last. Leveraged loans, finally receiving inflows and trading higher in the secondary market, are unlikely to continue the ride because the best of the credit cycle is behind us, Bank of America strategists said this week. In the high-yield market, where spreads have tightened 75 basis points since the end of the year, any further rally “is likely to be limited and more gradual,” UBS strategists said this week.
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