The resiliency of the credit market has been nothing short of amazing. Irrespective of all the negative global events in the headlines, credit spreads tightened last week, and the market easily absorbed an abundance of new issues. Indicative of the strength in the cash bond market, the Morningstar Corporate Bond Index tightened 3 basis points to +142; however, that change was less than the 8-basis-point tightening in the credit default swap market. Cash bonds lagged the synthetic market because of the sheer amount of new issues priced this week, but the strength in the CDS market provides a path for the cash market to continue to tighten.

A number of themes that we have outlined both in past Bond Strategists as well as our quarterly outlook are playing out in the market. Management teams have changed their focus from improving liquidity and protecting their balance sheets to expanding the income statement and returning value to shareholders. A substantial portion of new issues since the credit crisis were used to refinance short-term debt and lengthen maturity profiles. That's changing, as proceeds are now being used to fund acquisitions, share buybacks, and capital expansion. While the magnitude of these events can vary greatly and the impact may not necessarily cause a rating downgrade, they are typically detrimental to the bondholders and often increase credit risk. For example, proceeds from Limited's (LTD; rating BB+) new issue will fund share repurchases. We are not downgrading the firm, since our rating already encapsulates the company's historical predisposition to use cash flow to reward shareholders (as opposed to repaying debt) and our expectation that management will continue the same conduct. The credit spread on the existing bonds widened out from the mid- to high 200s to around 300, resulting in a market loss to existing bondholders.