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Hi-Grade Bonds: FOMC Sparks Credit Spreads Rally; Oil-Sector Issues Erase A.M. Widening

Heavy market tone over the last week dissipated a bit this afternoon after teal-leaf readers discerned more dovish-than-expected leanings from the FOMC, sparking a broad rally in high-grade credit spreads, most notably among bonds backing beleaguered oil-sector credits.

As equity prices surged higher and the VIX tumbled this afternoon, the CDX IG 23 contract, which was roughly one basis point wider on the day just ahead of the statement, snapped more than four basis points tighter following the release, ebbing to the 62-bps area at the equity close, according to Markit. That decline left the index near the year-to-date low of 60 bps established on March 5, and roughly 11 bps below the mid-January heights.

(Note: The on-the-run contract rolls to the CDX IG 24 on Friday, with a fixed coupon rate of 100 bps. Expected changes include the removal of Avon ProductsGenworth HoldingsM.D.C. Holdings, and Safeway Inc. from the index, and the offsetting additions of Apache Corp., Canadian Natural ResourcesDomtar, and Enbridge, according to Markit.)

While the FOMC, as expected, removed its “patient” language from the statement, the clear signal that hikes would only follow a convincing inflection in inflation trends and reliable employment growth cast substantial doubt that the consensus view for a first hike in June was still a safe bet.

The Fed language even facilitated a bounce in oil prices, which had plumbed new six-year lows this morning, driving bond spreads across the sector once again wider. Many 10- and 30-year issues backing names including ChevronContinental ResourcesKinder MorganMarathon PetroleumPlains All American PipelineTotal Capital CanadaTransocean andWilliams Partners traded today 10-20 bps wider for the session ahead of the Fed statement, only to erase those losses as oil prices recovered.

As reported earlier today, new bonds placed last Wednesday by offshore driller Noble – widely credited with sounding the alarm last September on decoupling supply and demand dynamics – had become the poster issues illustrating negative sentiment for the sector. Noble’s new 5.95% 10-year issue traded this morning in the T+430 area, or 40-45 bps wide of the initial reoffer, and recalling initial spread whispers for the deal last Wednesday from T+425-437.5.

But after the Fed statement, more seasoned intermediate- and long-dated Noble issues changed hands 10-20 bps tight on the day, trade data show.

And five-year CDS referencing peer Transocean – a fallen-angel candidate at BBB-/Baa3/BBB-, including downgrade reviews and S&P and Moody’s and a negative outlook at Fitch – declined to the 760-bps area after the Fed statement, in a 40-bps swing from the highest pre-Fed readings, adding distance from the January peaks north of 900 bps. For reference, that level stood at 180 bps ahead of that warning from Noble last September, according to data from Markit.

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