The spread between BP Capital Market America Inc. 2.937% 2023 (BPLN 23's, A) and Enterprise Products Operating LLC 3.75% 2025 (EPD 25's, BBB+) has been inverted in the last week. BPLN 23's have on average traded 29bps tighter to EPD 25's but is currently trading 6bps over (3 standard deviations). Holders of EPD 25's have the opportunity to take profits at 28bps and switch into the better-rated BPLN at 34bps, with expected compression of 35bps were the spread difference to return to the mean.
The spread difference between Berkshire Hathaway Energy Company 4.5% 2045 (BRKHEC 45's, A-) and Essential Utilities, Inc. 3.351% 2050 (WTRG 50's, BBB) has increased to the highest level in the last 12 months. While BRKHEC 45's have on average traded 6bps under WTRG 50's, they currently trade 16bps over (2.4 standard deviations). Since mid-November, when both credits traded at 160bps, WTRG 50's have tightened to 145bps while BRKHEC 45's have widened to 161bps.
The spread difference between PPL Capital Funding Inc. 4.125% 2030 (PPL 30's, BBB) and NRG Energy Inc. 3.75% 2024 (NRG 24's, BBB-) is inverted. While PPL 30's have on average traded 14bps through NRG 24's, they currently trade 30bps over (2.1 standard deviations). Holders of NRG 24's can take profits at 74bps and switch into PPL 30's at 104bps, with an expected compression of 44bps if the spread difference returns to the mean.
The spread difference between Raytheon Technologies Corporation 3.125% 2050 (RTX 50's, BBB+) and Caterpillar Inc. 5.2% 2041 (CAT 41's, A) has widened sharply. RTX 50's have on average traded 3bps over CAT 41's, however as CAT 41's tightened RTX 50's have widened, increasing the spread difference to 25bps (2.2 standard deviations). Holders of CAT 41's have the opportunity to take profits at 113bps and switch into RTX 50's at 138bps, with a potential compression of 22bps were the spread difference return to the mean.
The spread difference between Norfolk southern Corporation 3.942% 2047 (NSC 47's, BBB+) and the 4.837% 2041 (NSC 41's, BBB+) has inverted. NSC 47's have traded 4bps tighter than the NSC 41's on average during the last 12 months. Since early December the spread has inverted and currently NSC 47's trade 19bps over the NSC 41's (2.8 standard deviations). Holders of fNSC 41's have the opportunity to take profits on the recent tightening at 128bps and switch into the NSC 47's at 147bps, with an expected reversion of 23bps where the spread difference to return to the mean.
The spread in long-dated CNOOC and Sinopec bonds has widened in the last weeks, but CNOOC has moved further. While the credit spread of Sinopec Group Overseas Development (2018) Ltd 4.6% 2048 bonds (SINOPE 48's, A+) has increased by 10bps since mid-November, that of CNOOC Finance (2014) ULC bonds (CNOOC 44's, A+) has moved by 40bps. Over the last 12 months CNOOC 44's have traded 2bps wider to SINOPE 48's; the difference has increased to 31bps (3.9 standard deviations).
Wells Fargo & Company 5.013% 2051 bonds (WFC 51's, A) have traded 14bps tighter than the Prudential Financial 4.35% 2050 bonds (PRU 50's, A-) on average during the last 12 months. As the spread on PRU 50's has narrowed faster since early November, the difference has been inverted and currently WFC 51's trade 17bps over (2.6 standard deviations). Holders of PRU 50's have the opportunity to take profits at 150bps and switch into the 1-notch-better-rated WFC 51's at 157bps.
We revisit three trade ideas from a month ago.
On November 6 we identified a dislocation between Philip Morris International 4.375% 2041 (PAM 41's, A) and Anheuser-Bush Inbev Worldwide 4..35% 2040 (ABIBB, BBB+). The spread difference has narrowed from +6bps over to -10bps.
On November 10 we identified that Qualcomm 3.25% 2050 (QCOM 50's, A-) was trading tight to IBM Corp. 3.6% 2039 (IBM 39's, A). The spread difference has narrowed from 36bps to 21bps.
On November 12 we identified that Merk & Co 4% 2049 (MRK 49's, A+) was trading wide to UnitedHealth Group Inc. 2.9% 2050 (UNH 50's, A). The spread difference has narrowed from 6bps to -2bps.
Sudden widening in Wall Greens Boots Alliance spreads has resulted in a significant dislocation in the curve. While the the credit spread on the 4.65% 2046 bonds (WBA 46's, BBB) has gone from 254bps to 291bps, the 4.1% 2050 bonds (WBA 50's, BBB) have only widened from 240bps to 257bps. The WBA 46's have traded 13bps over the WBA 50's on average during the last 12 months and currently trade 34bps over (3.3 standard deviations). Holders of WBA 50's have the opportunity to increase their carry and could generate 22bps of alpha were the spread difference revert to the mean.
As spreads continue to narrow, we observe a dislocation between The Northwestern Mutual Life Insurance Company 6.063% 2040 (NORMUT 40's, AA-) and New York Life Insurance Company 3.75% 2050 (NYLIFE 50's, AA). NORMUT 40's have traded 14bps wider on average during the last 12 months. In the last 10 days NYLIFE 50's have tightened from 160bps to 147bps, while NORMUT has widened from 173bps to 180bps. The difference is now 34bps (3.2 standard deviations). Holders of NYLIFE have the opportunity to take profits and switch into NORMUT increasing carry and potentially generating alpha through relative tightening of 20bps where the spread difference to return to the mean.
On November 13th we published the trade idea to sell the Virginia Electric and Power Company 4.6% 2048 bonds (D 48's, A) and buy The East Ohio Gas Company 3% 2050 bonds (D 50's, A). On December 2nd the trade was 41bps in the money and we published a follow on trade to sell the D 50's and buy The Connecticut Light and Power Company 4% 2048 bonds (ES 48's, A+). This trade is now 18bps in the money. An original holder of the D 48's would have therefore seen a return of 59bps in 21 days while moving from A to A+ credit.
The spread difference between the Consolidated Edison Company of New York, Inc 6.75% 2038 bonds (ED 38's, A-) and the Southern company Gas Capital Corporation 5.875% 2041 bonds (SO 41's, BBB+) has narrowed as SO 41's tightened. While ED 38's have traded 40bps through the SO 41's over the last 12 months, they now trade 1bp over (2.4 standard deviations). Holders of SO 41's have the opportunity to take profits at 172bps and switch into the ED 38's at 173bps, 3 years shorter in maturity and a notch better in rating.
The trade idea published on November 13th to buy The East Ohio Gas Company 3% 2050 bonds (D 50's, A) and sell Virginia Electric and Power Company 4.6% 2048 bonds (D 48's, A) has returned 41bps in 19 days as theD 50's tightened from of 161bps to 115bps while the D 48's have only gone from 128bps to 122bps.
The sharp movement in D 50's has in turn created a new opportunity against The Connecticut Light and Power Company 4% 2048 bonds (ES 48's, A+), which have traded 16bps tighter than the D 50's on average during the last 12 months and currently are 6bps wider (3.5 standard deviations). Holders of D 50's have the opportunity to take profits at 115bps and switch to ES 48's at 121bps.
Sharp widening in the credit spread of Natura Cosmeticos 5.375% 2023 bonds (NATURA 23's, BB) creates a reversion opportunity of 245bps against NMB US Holdings 7% 2026 bonds (MRFGBZ 26's, BB-). NATURA 23's have traded 115bps tighter than MRFGBZ 26's on average during the last 12 months, but while NATURA 23'S have widened by over 200bps in the last week MRFGBZ 26's have tightened by 180bps during the last month. The spread difference has therefore been inverted and NATURA 23's now trade 129bps over MRFGBZ 26's (2.48 standard deviations). Holders of MRFGBZ 26's have the opportunity to take profits at 248bps and switch into NATURA 23's at 377bps, 3 years shorter and 1 notch better rated.
The spread difference between Bank of America Corporation 3.366% 2026 (BAC 26's, A) and 2.408% 2025 (BAC 25's, A) bonds has widened sharply. BAC 25's have tightened from 44bps to 16bps, while BAC 26's have remained stable at 51bps. The spread difference, which on average on average has been 6bps during the last 12 months hans increased to 35bps (2 standard deviations). An opportunity for holders of BAC 25's to take profits and increase carry.