CFAI material acknowledge that the statement above is counter-intuitive and this is what they say “Contrary to the normal supply-price relationship, relative credit returns often perform best during periods of heavy supply….the premise, ‘supply will hurt spreads,’ which may apply to an individual issuer, does not generally hold up for the entire credit market. During most years, increases in issuance (most notably during the first quarter of each year) are associated with market-spread contraction and strong relative returns for credit debt. In contrast, sharp supply declines are accompanied frequently by spread expansion and a major fall in both relative and absolute returns for credit securities. For example, this counter-intuitive effect was most noticeable during the August–October 1998 interval when new issuance nearly disappeared in the face of the substantial increase in credit spreads. (This period is referred to as the “Great Spread-Sector Crash.”)”
A possible explanation is that the new primary valuations validate the prices of outstanding issues which relieves price uncertainty and reduces all spreads and hence enhances the secondary valuations. Another way to think of it is that the increase in supply attracts attention and could be associated with even larger demand. Likewise, according to CFAI, “when primary origination declines sharply, secondary traders lose reinforcement from the primary market and tend to reduce their bids, which will increase the spread”. Another reason could be that “more bonds are issued during expansions, when companies are doing well” which also validates the state of the economy (and ultimately the bond market) and hence the narrowing of spreads.