Lower End Bonds are a Story

I have been looking at investment grade bonds and it is quite interesting, what I am seeing. I was under the belief that when people talk about the consumer economy is weakening → general US businesses are weakening → higher spread on investment grade bonds.

As lower end of the consumers are spending less, which affects the revenue of these companies. But what I am seeing is minor spreads over treasures even through alot of the sectors in this grade are heavily exposed to debt. And as treasury yields are rising, usually their debt servicing costs are rising. So as I was looking at BBB, I realized many of the companies issuing debt in this area or large companies worth billions.

So I took a deeper look at CCC rated bonds to see whether they are hurt. And it is relatively the same picture, the effective yield on them is 13.49% with spread of 9.44%, which is below their long-term average. It is interesting to see how that part of the tranche has been strong on a relative basis, given that large amount of these companies are small software companies and software only companies are going through a massive fall in stock prices, but the median small SaaS company is still growing revenue around 15%.

This is interesting because even though these small cap software companies are beating earnings with strong revenue, right now the market is not rewarding them. So on a fundamental level they might be strong for now, but these companies are at exposure of AI replacement as many of them have thin business models, ui layer and data layer but the lower end of the bond market has not priced that in.