Daily Archives: 6th January 2019
Daily Archives: 6th January 2019
The corporate bond market endured its most torrid period since the crisis began. It delivered the worst performance since 2008 in total return terms, with the level of spread weakness not far behind. As measured by the Markit iBoxx index, IG widened by 76bp, high yield by almost 240bp and, for example, the AT1 index by 342bp. No sector was spared, and the weakness accelerated through the final quarter on heightened macro and geopolitical concerns. That is most likely going to continue and be a theme for 2019, but we can expect the weakness to be much more limited as the various events play out.
As suggested above, credit total returns were the worst since the crisis began. IG lost 1.2% and the high yield market delivered a -3.6% total return. In relative terms, other markets lost more. The Dax delivered -18.2%, the FTSE -12.5% and the S&P recovered late on to -6.2%. There was a positive result, that came courtesy of the Eurozone’s government bond market, where demand for safe-haven risk saw a +0.9% result.
Returns in 2018
Primary market activity was affected by the broad volatility and weakness in most asset classes. The window to get a deal away was open all too infrequently, the hesitation by borrowers and push beckon pricing by investors leaving us with the lowest level of issuance in the IG non-financial sector since 2012, at just €221bn – against an average of €260bn per year in the 2014-2017 period. It will be a good result if we get close to the €220bn level in 2019. US borrowers were prevalent, but the 12% share of the overall market was the lowest since 2012 as well.
Senior financial deal flow was the lowest annual total since the beginning of the euro currency era. Just €130bn was printed versus the previous low of €136bn (in 2017). Given the weakening macro environment and continued high levels of volatility, we’re suggesting issuance declines again in 2019, to around €110bn.
HY Issuance: 2003 – 2019
High yield markets had a good year. In fact, it was the second-best year ever for deals in the HY capital markets, with some €62bn transacted. Most of that was issued in the first nine months of the year though, with wider concerns leaving the window shut for others through the final quarter. Spreads gapped, the index yield is up at 5% (both almost doubling) and we think issuance will decline in 2019 to around the €45bn level.
A particularly poor final quarter saw to it that corporate bond funds recorded a negative performance for the full year, pretty much across the board. Poor secondary market liquidity was a particular feature as well as frustration. That’s the nature of the beast. While we also had to contend with new issues launched with higher premiums than we might be used to, and whole sectors repriced as a result. The IG index lost around 1.2%, but most reasonably sized funds lost in excess of 2%.
In sterling, it was a similar picture, with the index off by just over 2%, but reasonably-sized funds (in excess of £1.5bn AUM) lost 3% or more.
>>See the full IG Euro Performance tables<<
>>See the full HY Euro Performance tables<<
>>See the full Sterling IG & Sterling HY Performance tables<<
Overall, we endured a torrid time of it in 2018. Others did worse, but it’s scant consolation. Given the severity of the equity markets’ volatility, it was always going to have a contagion impact on the corporate bond market. The corporate bond market held up quite well until the final quarter, where it then came under some greater levels of pressure and performance deteriorated more rapidly.
As we head into 2019, we should exercise caution, be wary of buying any dips and not chase any rallies. The macro environment is extremely challenging and geopolitical stresses remain elevated. The picture ought to become clearer over the next few weeks. Good luck.
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
|🇬🇧 FTSE 100 6050.59, (+0.31%)||🇩🇪 DAX 12687.53, (+0.10%)||🇺🇸 S&P 500 3360.47, (+0.20%)|
With the noise associated with the opening week of any year out of the way, we can now focus properly on the near-term outlook for the markets. It was some noise, with the markets flying in the closing session, equities up by over 3% in some instances. The US jobs report was excellent and the principal driver of the rally, while there was hope in some quarters of a trade breakthrough as US-Chinese representatives are due to meet. However, we’re not sure that last week’s closing rally will have done much to have altered anyone’s view. We would not be buying into it. Still, it has likely opened the window for a few deals in credit primary as we kick off business this week. Borrowers should grasp the opportunity.
In addition, Powell’s upbeat assessment of the US economy was welcomed (it’s his job after all) and also went some way in helping to quash the downward spiral in sentiment and markets.
Macro is going to dominate for the moment though. Even if the Fed’s Powell suggests otherwise, industrial data from the US suggests all is not well (labour market aside) as the corporate sector and the economy overall feel the heat of a slowdown, and adds to the gloomy data before it from China. The Chinese have reacted by reducing their banks’ reserve requirement (again) and it also might have added lift spirits – but only temporarily. We think they’re pushing against a string.