Archive

Monthly Archives: January 2019

22nd January 2019

Muddling through after a purple patch

MARKET CLOSE:
iTraxx Main

77.7bp, +2bp

iTraxx X-Over

328.5bp, +9.5bp

🇩🇪 10 Yr Bund

0.24%, -2bp

iBoxx Corp IG

B+169.6bp, -0.2bp

iBoxx Corp HY

B+498bp, +3bp

🇺🇸 10 Yr US T-Bond

2.73%, -5bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Credit recovery could be sustainable, if…

The outlook for credit appears reasonably good at the moment. But we need equities to play their part – that is, hold these levels at worst – and if they can then, we are going to see more performance from the corporate bond market. And the high/low beta compression play might be on again, although that might be too much to ask. It’s been a while. We’ve widened too much in both areas of the credit market and while entry levels look more appealing in IG, higher yielding paper (not always necessarily high yield corporate debt) is benefiting from the bid for yield.

Nevertheless, if macro activity can plod along at these lower/moderately declining growth levels, then the high yield corporate bond market is going to look oversold. Already in these early skirmishes of 2019, investors have piled into the bank AT1 market and generated some great returns.

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21st January 2019

CoCo pops up | Bank Capital Insights

CoCo index is up 3% YTD.. and it is just 20 days in the new year

So, AT1 bonds have generically rallied 3 points or so but some bonds are up 4-5 points in a very short period and given the cash prices (low to mid 80s) it translates to a 5% return.   All this in the first 3 weeks of this year and almost half the returns (10%) I had penciled in this for the entire year.

Why did CoCos pop? In a nutshell the performance was driven by re-assessment of rates…..

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20th January 2019

Markets have their mojo back!

MARKET CLOSE:
iTraxx Main

76.2bp, -2.3bp

iTraxx X-Over

321.2bp, -8bp

🇩🇪 10 Yr Bund

0.26%, +2bp

iBoxx Corp IG

B+171bp, -2.5bp

iBoxx Corp HY

B+496bp, -5bp

🇺🇸 10 Yr US T-Bond

2.79%, +4bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

And credit shakes-off its New Year hangover…

Following a relatively inauspicious start, corporate bond market investors have got their trotters on and their zest for risk. It’s been a delayed reaction for investors to get involved and the small amount by which they are, is enough to have spreads start to claw back those earlier New Year losses. IG spreads are back to flat for the year. There might be something in it that primary, while up and running, hasn’t been as effusive as many would have thought. Or, we haven’t yet had that ‘jumbo secondary repricing’ deal which has all and sundry running scared. Whatever, there has been an abrupt turn in spread direction following several sessions of stability following some significant weakness. Most risk markets are showing positive returns so far this year, and now credit is, too.

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18th January 2019

You want yield but from “Almost safe bank”? | Bank Capital Insights

What yields 8.5% YTC and 6% YTP and is issued by the “most defensive” European bank?

In the land of the high yielding USD AT1s, a number of issues appear very attractive to own given cash prices and recent sell off.  Out of that lot, a couple of issuers stand out given their strong balance sheet, low risk business model and are shielded from most tail risks.  One such name is UBS which reduced the reliance from the volatile FICC units to more stable wealth and asset management businesses.   The UBS 5 Perp 23 AT1 in USD…..

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16th January 2019

Change in the air…Not

MARKET CLOSE:
iTraxx Main

78.1bp, -2.6bp

iTraxx X-Over

326.6bp, -7.2bp

🇩🇪 10 Yr Bund

0.22%, +2bp

iBoxx Corp IG

B+174.8bp, -3bp

iBoxx Corp HY

B+505bp, -11bp

🇺🇸 10 Yr US T-Bond

2.73%, +2bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

The status quo won’t cut it…

BoE Governor Mark Carney

The BoE’s Carney was again doing his best to talk up the benefits of no Brexit after that humiliating vote on Tuesday, but that we expect from the establishment. No one knows where this will lead to, but on we go. May’s agreed deal with the EU spectacularly failed the Westminster test, just as we expected.

On Wednesday she won her vote of no confidence, also as expected. The EU has thus far refused to budge and extend any kind of an olive branch. They will only be judged as being good negotiators if they manage to eventually get a deal close to the one currently agreed. Anything else, because of ‘the process’, stubbornness and/or a failure to yield might ultimately have severe repercussions for the EU (we think economic and existential risks even). The markets didn’t really react though save for a bit of volatility around sterling, which will have passed most by. The concern for most remains global macro.

So that big drop in new car registrations in December (-8.4% after -8% in November) doesn’t bode well on the demand front from such an economically important industrial sector and suggests we are in for an extended period of economic weakness.

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15th January 2019

Voting for a renaissance

MARKET CLOSE:
iTraxx Main

80.7bp, -1.9bp

iTraxx X-Over

333.8bp, -8bp

🇩🇪 10 Yr Bund

0.20%, -3bp

iBoxx Corp IG

B+177.9bp, -0.9bp

iBoxx Corp HY

B+516.4bp, unchanged

🇺🇸 10 Yr US T-Bond

2.71%, unchanged

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Time to Juncker it…

All eyes were supposed to be on Westminster, but there was a more than a glance on German GDP data. They might have avoided a technical recession with Q4 GDP managing to record a positive result, but Germany did record the lowest GDP growth since 2013, as last year’s expansion came in at 1.5%. That’s down from 2.2% in 2017 and corroborates all the emerging data elsewhere pointing to difficult times ahead on the macro front.

What it might mean is that the EU will need to acquiesce to some of the UK’s demands (namely the Irish backstop) or a hard Brexit will plunge the whole region into even greater difficulty. The UK might not be able to afford much pain in the near term should we go out on WTO terms and a no-deal, but the EU can’t either. It’s time for the latter’s establishment to step-up.

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15th January 2019

Steady, Stable, Sound – thus far | Bank Capital Insights

Decent start to US bank earnings

We had three large US banks (Citi, JPM, Wells Fargo) report Q4 2018 earnings and there were similar attributes in terms of earnings, outlook and similar comments on the state of the US economy.   All three reported sound increases in year-on-year earnings though they fell short in terms of market expectations/forecasts.  All three banks reported ROE close to double digits and reaching their COE.  Also, asset quality and capital metrics look robust and well placed to handle any unexpected sharp economic slowdown.

But, having said that, what is clear is that FICC business is becoming more and more difficult to make decent returns and this despite the massive volatility in rates and currency markets in Q4 2017.  JPM’s 21% drop and Citi 16% drop in FICC does not bode well for other investment banks that are reliant on FICC revenues.

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14th January 2019

It’s showtime

MARKET CLOSE:
iTraxx Main

82.5bp, +1.9bp

iTraxx X-Over

342.7bp, +8.7bp

🇩🇪 10 Yr Bund

0.23%, unchanged

iBoxx Corp IG

B+178.8bp, +0.4bp

iBoxx Corp HY

B+516.6bp, +2.5bp

🇺🇸 10 Yr US T-Bond

2.70%, unchanged

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

May’s Churchillian moment lost…

The time has come. We are into probably the most important week for British politics for a generation where Theresa May has already lost her chance for greatness and democracy (as we know it to be in the UK) was quashed. It’s not even about fine margins anymore. The Brexit vote will be the focus, but we will watch what happens in the immediate aftermath, as the government (as it surely will do) loses the vote on May’s deal later today.

We’re not sure that the markets had reacted or not to that news during the session, given that the Chinese export data was more important in global context. In fact, it will be a China ‘thing’ as far as markets are concerned. Its export performance was weaker than expected in December, and the fault didn’t lay squarely on the US/China trade spat. Global macro is slowing, the repercussions are really yet to be felt, and the policy response will be too late. In the meantime, Eurozone recession fears are mounting.

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13th January 2019

Now comes the hard part | Bank Capital Insights

Will forthcoming bank earnings help or hinder risk sentiment?

Last week was a good one for risk assets especially in bank capital (and within that AT1) driven by dovish Fed speak, trade war resolution optimism and no new “unknowns” to rattle investors.  Add to that the lack of supply in high yielding paper in bank capital land and the result was a sharp rally.

But seasoned investors would have also noticed that none of the underlying issues impacting European banks have gone away (slow growth, margin pressure, liquidity pressure, high cost base) and hence caution is probably the next best strategy here.

So what now?  Is this the beginning of a new risk on phase or just another false dawn…
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13th January 2019

It’s been all too easy

MARKET CLOSE:
iTraxx Main

80.6bp, -1.9bp

iTraxx X-Over

334.0bp, -3.3bp

🇩🇪 10 Yr Bund

0.18%, -2bp

iBoxx Corp IG

B+178.5bp, -1.3bp

iBoxx Corp HY

B+514bp, -3.5bp

🇺🇸 10 Yr US T-Bond

2.70%, -3bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Water set to get a little murkier…

The markets have broadly looked on the bright side in this opening week of the year, against most investors’ (and our) original expectations. Macro weakness has largely been ignored as we choose instead to focus on rate policy and get caught up on whether the Fed is done for the year, our any further hikes will be limited and/or delayed. Otherwise, little has changed to justify the upbeat tone in the market except that inflows into most asset classes need investing, so forcing one’s hand.

Equities might have just failed to rise in every session last week but had a good run nevertheless, rates were choppy in small ranges but look well-anchored having displayed a more defensive posture as we ended the week. IG credit curiously only widened while primary surprised to the upside. That’s a mixed bag suggestive of each market playing to its own tune as the classic and well-established correlations between them start to diverge.

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