As we expected, last week was especially busy in the new issue debt market, with more than $40 billion of new issues priced. We are hearing from syndicate desks that this week should be busy as well: There could be another $30 billion of new issues primed to launch.
While the current agreement in Washington, D.C., has resolved the tax increase issue and forestalled spending cuts under sequestration, it has addressed neither the fact that the United States has already reached its current debt ceiling, nor the longer-term issues of spending cuts and entitlement reform. CFOs thinking about issuing debt during the first quarter of this year would be well advised to tap the capital markets while the new issue window is open rather than risk trying to come to market after these issues return to the forefront. Once the next political battle heats up in earnest, access to the new issue market could quickly become impaired.
Even though investors had plenty of cash ready to put to work, the sheer volume of new issuance and the lack of new issue concessions led to a bout of indigestion in many of last week's deals. For example, 
Sunoco Logistics Partners' (SXL) new issue struggled in the secondary markets. After pricing at +155, its new 10-year bonds ended the week almost 10 basis points wider. Bank of America's (BAC) new 10-year notes gave up much of their gains by the end of the week in the secondary market.
Most new issues still traded slightly higher last week, but considering that underwriters generally haven't been providing new issue concessions lately, only a few deals tightened to any significant degree in the secondary markets.
Harbinger of Things to Come
This week may foretell the near-term direction for credit spreads. Between $40 billion last week and potentially another $30 billion this week, the absolute volume of new issues may quickly outpace the amount of cash that needs to be put to work. In addition, with few to no new issue concessions and numerous deals trading wide of new issue spreads, many investors may decide to hold off on investing in new transactions until they have a better view on the fundamental outlook. As fourth-quarter earnings season ramps into full gear over the next few weeks, we should get a clearer read on how the economies around the world are holding up. However, if new issues perform well this week, it may be the green light to take credit spreads tighter.
The average spread in Morningstar's Corporate Bond Index tightened 2 basis points last week to +133, which is only 4 basis points higher than the tightest level reached since the 2008-09 credit crisis (+129 in April 2010). Credit spreads in the financial sector tightened 4 basis points, slightly outperforming the industrial sector, which tightened 1 basis point.
Market Moves in Europe
Credit spreads in Morningstar's Eurobond Corporate Index have continued to tighten and at +129 are 4 basis points tighter than Morningstar's US Corporate Bond Index. The average credit spread in our European corporate bond index had traded as much as 81 basis points wide of the US index (November 2011).
The corporate bond markets were not the only risk assets pricing in a benign outlook. Spanish bonds rallied last week after a very successful bond auction. The yield on Spain's 10-year bonds dropped 17 basis points to 4.89%, nearing the lowest yield and spread since October 2010.
At 4.16%, the yield on Italian 10-year bonds dropped to its lowest since October 2010 and is 300 basis points tighter than where it peaked in November 2011. We continue to be leery of the economic conditions in Europe and don't think that the sovereign debt crisis has been fully resolved. As such, we think investors may prefer to concentrate on issuers with high exposure to US markets where we anticipate continued modest economic growth.
