Archive

Monthly Archives: July 2019

22nd July 2019

Capital appreciation, negative yields…

MARKET CLOSE:
iTraxx Main

58.7bp, -2.1bp

iTraxx X-Over

249.1bp, -3.1bp

🇩🇪 10 Yr Bund

-0.34%, -2bp

iBoxx Corp IG

B+116bp, unchanged

iBoxx Corp HY

B+419bp, unchanged

🇺🇸 10 Yr US T-Bond

2.03%, -2bp

🇬🇧 FTSE 100

7344.92, -11.50
🇩🇪 DAX

12468.01, -0.25
🇺🇸 S&P 500

2992.07, +0.35

The trend is your friend…

An ever-increasing number of corporate bonds are falling into negative yield territory – or offering ever-declining (positive) yield for the rating, with the low hanging fruit just about picked off. With policy easing around the corner, the juice is coming from capital appreciation. The corporate bond market is seen as being a defensive investment (protecting capital) and comes amid little guarantee that traditional capital appreciation strategies (long equities) might be too volatile to pay off going forward.

Fixed income asset prices are rising so rate markets still work (yield becomes increasingly irrelevant) and asset allocators will retain their exposures. We would argue that credit has had its best ‘unassisted’ run in performance since the crisis began and looks set to add to it through the rest of 2019. IG credit sitting on 6% in total returns (iBoxx YTD) is looking at 8%+ come year-end; the AT1 market possibly 13%+ (10% at moment). Eurozone rates have already returned 7% this year!

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17th July 2019

Corporate bond market QE – please no!

MARKET CLOSE:
iTraxx Main

50.2bp, +0.4bp

iTraxx X-Over

248.7bp, +2.8bp

🇩🇪 10 Yr Bund

-0.29%, -4bp

iBoxx Corp IG

B+116.2bp, +0.7bp

iBoxx Corp HY

B+412bp, +7bp

🇺🇸 10 Yr US T-Bond

2.05%, -7bp

🇬🇧 FTSE 100

7344.92, -11.50
🇩🇪 DAX

12468.01, -0.25
🇺🇸 S&P 500

2992.07, +0.35

QE ‘fix’ unwelcome…

The corporate bond market is anything but broken. Issuers are easily funding at or close to their lowest ever levels. Investors are hugely receptive of deals – across the ratings spectrum, and by a large margin. Demand for new corporate debt is holding at oversubscriptions typically in the 3x – 7x area. In IG non-financials, the annual run rate is close to a record level, senior offerings are rising and high yield borrowers are also being funded, rather easily.

We would wonder what the objective might be if the ECB get involved again. After all, there is little or no need to reduce borrowers’ funding costs by giving the markets a nudge. There’s plenty of demand from investors with (iBoxx index) yields at record low levels and spreads in some markets heading that way too, again.

It appears in credit as if we have established the set-up for the summer weeks. We’re going to grind a little better in spread terms, returns are likely going to hold up because rates having had their wobbly now appear to have a fresh footing while primary has already slowed. We should come out the other side (at the end of August) with IG spreads heading inexorably towards that B+100bp mark (iBoxx index, currently at B+115bp, -48bp year to date), and total return investors sitting on returns of 10%+ for AT1, in the 8% area for HY and around 6% in IG.

The deals at the moment are hitting the screens with little or no competition but highlighting the grab for yield include Monte Dei Paschi’s T2 offering (coupon of 10.5%, it paid 5.375% in Jan 2018) and after an 18-month absence, Greece’s new administration was back for €2.5bn in a 7-year (with just a 1.9% yield).

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14th July 2019

Here comes the summer sun…

MARKET CLOSE:
iTraxx Main

49.3bp, -0.1bp

iTraxx X-Over

245.9bp, -0.1bp

🇩🇪 10 Yr Bund

-0.25%, -1bp

iBoxx Corp IG

B+116.5bp, -0.5bp

iBoxx Corp HY

B+402.8bp, -0.5bp

🇺🇸 10 Yr US T-Bond

2.12%, unchanged

🇬🇧 FTSE 100

7344.92, -11.50
🇩🇪 DAX

12468.01, -0.25
🇺🇸 S&P 500

2992.07, +0.35

Markets play it cool…

Equities in the US into record territory, rates giving up some of their stellar gains and IG credit spreads at levels not seen since May 2018. A dovish Fed has laid the foundations for a rate cut at the end of month FOMC meeting, and the ECB looks as if they will also cut the deposit rate and/or announce a new QE programme. Equities will get a further boost, rates will recover their recent losses and yields will plunge lower while credit spreads will tighten some more as we set the stage for a post-summer rally.

We’ve had far less primary than might have been expected last week and it would appear that the markets have pretty much wound down for the holiday period. We barely added anything in IG, the HY market is yet to see a deal this month – while financials have been busy with some well-received and testy AT1 offerings appealing to the yield hogs.

IG credit spreads have ground out some further performance and the IG iBoxx cash index has tightened to B+116.5bp. That represents 9bp of tightening this month, while returns are only marginally off their year to date highs and up 0.25% in July.

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7th July 2019

Liquidity aplenty, but expensive to hold

MARKET CLOSE:
iTraxx Main

50.2bp, +1.4bp

iTraxx X-Over

243.5bp, +6.7bp

🇩🇪 10 Yr Bund

-0.36%, +4bp

iBoxx Corp IG

B+119bp, -1bp

iBoxx Corp HY

B+399bp, -2bp

🇺🇸 10 Yr US T-Bond

2.03%, +8bp

🇬🇧 FTSE 100

7344.92, -11.50
🇩🇪 DAX

12468.01, -0.25
🇺🇸 S&P 500

2992.07, +0.35

… and greater risks emerging

Until the late pull back when markets were undermined by the minutiae of the timing of any Fed rate cut, it was looking fantastic. Actually, we don’t think it changes much and it is looking very good still. We’re in the midst of the mightiest bond grabfest in history. We have record low bond yields. Corporate funding costs are collapsing. The S&P500 was almost at 3,000 (and up almost 20% this year) is no mean feat, either. It’s record-breaking territory almost everywhere one looks. All that is left is for corporate bond spreads to tighten – a lot – to join the record breakers club. It’s a euphoric time but declining yields/rate cuts/injection of liquidity into markets are no panacea for macro recovery.

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2nd July 2019

Treading water

Keeping the faith… The euphoria of the month’s opening session hit a brick wall, leaving us with what could best be described as a more reflective day for the most part. Hopes and positive soundbites driving markets higher were replaced by the need for something more concrete to emerge from any US-Sino talks. Markets were […]
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1st July 2019

Eurozone rates pencil in depression!

The market expects… It could only ever have been a positive session following the weekend’s events. President Trump gave reason aplenty for risk markets to rally as pressure eased on several fronts. Hopes of a reasonable trade tariff outcome, the softening of the US stance on Huawei and, for good measure, the love-in at the […]
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