January Sales Suggest Continued Credit Squeeze

As we enter 2021 the demand for suitable income delivering products remains just as strong as it has been in every other January since the recovery after the financial crisis.

Usually though in January, after a barren month of December, the supply taps are opened and fresh and often exciting new issuance comes to the market. What can we expect this January after a record year of almost panic-driven supply in 2020 as borrowers sought to bolster their liquidity profiles?

Early indications from the investment banks tell us that we will have a reasonable month of supply, however it will likely fall short of what we would normally expect given such good market conditions, as borrowers did plenty of pre-financing in 2020. In addition, a lot of the expected supply is likely to be refinancing rather than net new supply. From an investment banker’s perspective then a relatively disappointing January, but on the flip side deals should be easy to place with big books relative to deal size.

We suspect fixed income managers have in general come into the new year carrying more cash and cash equivalents than they would have liked given the way the market has been performing, and December will only have added to this position as bond managers do tend to gather cash in the weeks before year-end as inflows outstrip available trading opportunities. December was very typical in that regard.

So while we enter 2021 with plenty of negative headline news on the virus, along with the associated inevitable downgrade or delay to the economic recovery, in our view the technical position remains just as firm as it has been in the last nine months. Investors can thus expect a continuation in the credit squeeze that was prevalent last year as new supply in January fails to soak up the appetite from bond managers.