Credit Spreads are not Confirming the VIX

The VIX currently has a 12 handle and appears to be getting ready to break back down to levels not seen since before the financial crisis.  Prior to 2007 the VIX was quoted in a more narrow range at a lower level than its recent range.  In 2007 there was a structural break and the VIX rose as risk appetite collapsed.  Now for the first time since 2005-2006, the VIX is approaching old levels.  To many this could signal that risk appetite has returned to pre-crisis levels.

Investment grade credit spreads display a similar structural break to the VIX beginning in mid 2007, but the VIX's recent decline to previous lows has not been matched by a tightening of credit spreads.  While that might suggest that the VIX isn't telling the full story on risk appetite, it's tough to say which indicator gives a clearer picture because all in yields are much lower than they were in 2006 even if spreads have not completely compressed.

Data via FRED

Corporate Bond Issuance Since 1996

With interest rates at record lows and possible tax changes on the horizon, a number of companies have been accessing corporate debt markets and using the proceeds to alter their cap structure.  Today, Intel was the latest company to announce a debt offering to repurchase shares after that stock has fallen more than 30% since May.

One of the goals of maintaining a zero interest rate environment is to encourage consumers and companies to take actions like this.  The Fed is trying to push the economy to re-lever.  So far, it has had mixed success in this pursuit, although borrowing has begun to pick back up in 2012.

As far as corporate debt securities go, 2012 could be a strong year.  US companies are on pace to issue $1.3T in new debt into securities markets (through October).  This would be a new all time high and is already more than was sold in all of 2011.  As a percentage of corporate bonds outstanding though, that number is still lower than in the late 90s--only 16% vs over 25% back then.  It's almost double what was issued in 2008 when credit markets froze though.

Source: SIFMA