Archive

Monthly Archives: September 2019

30th September 2019

Fortune favours the brave

MARKET CLOSE:
iTraxx Main

55.4bp, -0.8bp

iTraxx X-Over

233.3bp, +0.3bp

🇩🇪 10 Yr Bund

-0.57%, unchanged

iBoxx Corp IG

B+123.7bp, -0.3bp

iBoxx Corp HY

B+416bp, +2bp

🇺🇸 10 Yr US T-Bond

1.68%, +1bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Chapter 10 up next…

Most of the corporate bond market’s performance in 2019 came in the first six months, but it’s still been a decent third quarter for credit. IG might have lost its way a little in September after the rate market unwind, but it still managed to come up with +1.2% in total returns for the 3-month period (iBoxx). There was also no small matter of having to absorb a massive €85bn of deals in non-financials and €34bn of senior issuance. The AT1 market gave +2.2% in the quarter, the high yield market +1.3% while the best in the class was sterling credit, where total returns came in at a sprightly +3.7% helped along by the sustained bid for the underlying.

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29th September 2019

Finishing line is in sight

MARKET CLOSE:
iTraxx Main

56.2bp, unchanged

iTraxx X-Over

233bp, unchanged

🇩🇪 10 Yr Bund

-0.57%, +1bp

iBoxx Corp IG

B+124bp, -0.5bp

iBoxx Corp HY

B+414bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, +1bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Can’t keep him out of the headlines…

The quarter draws to a close with many of the risks besetting us all year and potentially serving to derail the markets still with us. Trump obviously tops the list of risks, but Brexit has moved up to second spot as no-deal becomes a clear and present danger. Weakening macro always lurks as a big concern just as the US/Chinese trade dispute potentially breaks new ground, and we have the Middle East geopolitical risks entering the top five in the list of imponderables.

With situations intensifying in several cases, the accompanying market jitters might serve to stymie any hopes of a material rally in risk assets (namely equities) as safe havens come into focus once again. Credit has so far avoided much of the periods of broader market volatility. Investors have found a way to manoeuvre the pitfalls, and have instead gorged on the copious amounts of deals as well as having clipped excellent corporate bond portfolio performance – that particular dynamic is unusual.

Euro-denominated IG credit has returned 6.7% year to date, sterling IG credit 11.2% and the AT1 market 12.3% (iBoxx). Non-financial IG corporate issuance levels have exceeded €250bn and we now have an eye now on the full-year record (€285bn/2009), while the HY market is closing in on last year’s €62bn total (currently at €48bn).

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26th September 2019

Pulling down the curtain on Q3

MARKET CLOSE:
iTraxx Main

56.3bp, +0.7bp

iTraxx X-Over

233.1bp, +2.1bp

🇩🇪 10 Yr Bund

-0.58%, unchanged

iBoxx Corp IG

B+124.6bp, unchanged

iBoxx Corp HY

B+413bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, -4bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Calm transcends the corporate bond market…

With just a couple of session to go, we look back at a rather mixed month for credit investors. Awash with new issuance and with the best month for IG non-financial deals since 2014, IG spreads only widened by 4bp (iBoxx index) and total returns have delivered a rare monthly loss for 2019, of 0.9%. Clearly, we can ascribe the weakness in spreads to the heavy issuance volumes (almost €50bn) even if has been extremely limited, where support for the market benefits from pent-up demand and the upcoming ECB purchase programme.

As for the near 1% loss in returns month to date, that is predominately rates-related, given the sharp reversal in Bund yields from off record lows from early September. The yield on the 10-year has risen from -0.71% to -0.59% currently, for example, with a similar move in the front end.

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25th September 2019

🗞️ Relax, it’s just a stumble

MARKET CLOSE:
iTraxx Main

55bp, -+xxbp

iTraxx X-Over

230.9bp, +7.6bp

🇩🇪 10 Yr Bund

-0.59%, +1bp

iBoxx Corp IG

B+124.5bp, +0.5bp

iBoxx Corp HY

B+413bp, +8bp

🇺🇸 10 Yr US T-Bond

1.71%, +7bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Mild disruption fails to sully Q3 for corporate bond market…

Impeachment proceedings against President Trump and uncertainty around Brexit were enough to effectively write off Wednesday’s session. The brouhaha around both situations left the markets to warrant their customary defensive stance amid the potential for chaos. It doesn’t help that Trump suggests stock markets would crash if he is impeached (some sort of desperate threat from him) while we have little real idea how the next few weeks will play out on the Brexit front. Primary credit was still chugging along, though – albeit at a slower pace versus the opening three weeks of the month, with several deals to keep us interested.

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24th September 2019

Lies, lies and more lies

MARKET CLOSE:
iTraxx Main

55.0bp, unchanged

iTraxx X-Over

223.3bp, -0.7bp

🇩🇪 10 Yr Bund

-0.60%, -2bp

iBoxx Corp IG

B+124bp, unchanged

iBoxx Corp HY

B+405bp, +4bp

🇺🇸 10 Yr US T-Bond

1.66%, -5bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Primary keeping credit markets occupied…

Thermo Fisher, what else? The US borrower finally hit the screens and added €4.4bn to the IG non-financial corporate bond issuance tally, leaving September (with four sessions still to go) as the best month for deals in years. For the full-year, we’re up at €250bn and, unless the market completely falls out of bed (unlikely), just another €35bn is needed between now and year-end for a record annual total. We’re calling it, with €300bn very much in view.

There’s clearly still decent enough demand for corporate bond risk. Corporate treasury desks, never ones to miss an opportunity to get cheap funding on balance sheet, have been falling over themselves to do just that. Investors, on the other hand, are also front-running the ECB and trying to get their hands on paper before the manipulative hand of the central bank makes its presence felt.

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23rd September 2019

The numbers don’t lie

MARKET CLOSE:
iTraxx Main

55.5bp, +1.3bp

iTraxx X-Over

224.0bp, +8.4bp

🇩🇪 10 Yr Bund

-0.58%, -6bp

iBoxx Corp IG

B+124bp, +1.5bp

iBoxx Corp HY

B+401bp, +7bp

🇺🇸 10 Yr US T-Bond

1.70%, -5bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

We’re in recession…

The opening session of the week was a ‘run for the hills’ moment. Not such a bad thing for fixed income markets with that rally in safe havens. There was unrest in Hong Kong again over the weekend, services and manufacturing PMIs in both Germany and France for September were very weak, Middle East geopolitical concerns continue to concern and those trade talks between the US and China are still up in the air.

Thomas Cook’s demise, although anticipated by market participants over the past few months (see our report from May), would still clearly have added to the weaker tone.

It’s probably safe to assume that the continued decline global trade will make sure that Germany enters a ‘technical’ recession at the end of Q3, and the Eurozone as a whole won’t be far behind. The numbers suggest that we are back in economic crisis territory, given that the data is now showing the weakest levels of activity (in German manufacturing anyway) since 2008. And it is happening without the associated collapse in financial markets.

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22nd September 2019

One step at a time

MARKET CLOSE:
iTraxx Main/S32

54.2bp

iTraxx X-Over/S32

215.6bp

🇩🇪 10 Yr Bund

-0.52%, -1bp

iBoxx Corp IG

B+122.5bp, unchanged

iBoxx Corp HY

B+394bp, unchanged

🇺🇸 10 Yr US T-Bond

1.72%, -3bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Q3 finishing line beckons…

We’re into the final week of the month and we should more than hang on to current performance. With stimulus in abundance and/or dovish policy broadly confirmed to be in place, there should be little reason to be fearful for Q3’s performance over the next few sessions. Fixed income’s year to date returns numbers are therefore going to look excellent, even if we have given a little back of late.

The credit primary market is throwing out deals aplenty and investors are lapping them up. Negative yields at re-offer are no deterrent. Prices are going higher – that’s good enough.

The recent sell-off in rates has pushed IG returns back to 6.5% year to date having put on only 1% in Q3 so far (that’s no hardship for this asset class) and Eurozone sovereign returns to back below 10%, to 9.2% (+3% in Q3 to date). Also no hardship. IG spreads, though, have lost a little of their lustre following a good rally initially, coming immediately after the ECB QE announcement – but we have had close-on the heaviest month of issuance since our records show going back to 2014. That explains much.

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19th September 2019

Primary’s going to erupt again

MARKET CLOSE:
iTraxx Main

47.8bp, -0.3bp

iTraxx X-Over

245bp, -2bp

🇩🇪 10 Yr Bund

-0.50%, +1bp

iBoxx Corp IG

B+122bp, unchanged

iBoxx Corp HY

B+395bp, unchanged

🇺🇸 10 Yr US T-Bond

1.79%, unchanged

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

Much needed breather sets us up nicely…

The latest round of central bank meetings are over. We have been left a bit to think about, though, with the Fed alone failing to offer a dovish note. The US central bank didn’t really nail it in the sense that they only did enough to keep the markets guessing some more, with Powell preferring to adopt a ‘moderate adjustments’ policy to the fed funds rate. However, it is time for markets to trade free from the shackles of policy uncertainty and focus on the incoming data as well geopolitical machinations wherever they might be. Few are fretting about any of it in European credit. We’re just waiting for the next deal (and they’re coming in droves) in a year which looks odds-on to set a new record for IG non-financial issuance. €300bn is our target (€246bn now, €285bn record in 2009).

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18th September 2019

Panic stations, but few worry

MARKET CLOSE:
iTraxx Main

48.0bp, -0.5bp

iTraxx X-Over

247.0bp, -2.5bp

🇩🇪 10 Yr Bund

-0.51%, -4bp

iBoxx Corp IG

B+122bp, +2bp

iBoxx Corp HY

B+395bp, unchanged

🇺🇸 10 Yr US T-Bond

1.75%, -6bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-3.37%)

…as borrowers flood the market

It almost seems like panic selling… of debt securities by corporates. It ought not to be the case (or viewed that way) because low funding costs are here to stay. However, it’s rational that corporates are in the market as they can, in many cases, borrow easily and be paid to do so – just as Glaxo’s front-end €2.5bn grab demonstrated earlier this week. The drivers are obvious and made possible by the plummeting in funding costs this year. There’s a huge element of prefunding obligations which might not even come due until late next year or the year after. But the cash can also be used to buy back shares, boost P&L, increase EPS and prop-up share prices! And if it costs next to nothing – or nothing to issue, why not?

Admittedly, there’s a receptive investor base ‘panic’-buying the deals as they are offered. It’s got to be ECB-related as the deepest pockets in the market readies for action. As a result, we’re heading for the best month of issuance since 2014, and a record year for IG non-financial volumes. The follow-through into the high yield primary market – as yet – is missing, but that might come closer to/or after the purchase programme has commenced. Or when IG spreads have managed to crunch more from current levels.

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17th September 2019

HY: Comfortably Numb (Free Content)

“May you live in interesting times”…

In my last note, I suggested a rotation from more expensive BBs into Bs as a means of reducing systematic risk and in preparation for a squeeze in yields as we enter the year-end period. YTD performance and valuations all point to caution as we enter the home straight. Q3 earnings will be critical in determining who is on the right side of the “Earnings Recession” debate. Over the next few notes, I plan on identifying those safe places to hide as well as (try) to develop a valuation framework for the asset class.

The old Chinese curse (May you live in interesting times) is certainly applicable to credit investors.  Last week’s power moves by Draghi have yet to sink in and, added to that, rising oil prices are increasing concerns of constraining sluggish growth. 

Systematic drivers (read rates, and a declining but stable economic background) could see spread compression increase. In an intensified hunt for yield, I wonder just how much incremental QE directly supports credit fundamentals. 

Clearly, easy money and low lending rates have made for low defaults. But given the amount of cash already in the system, the marginal benefit is likely to have diminishing returns. “Zombie” companies that should have gone to the grave long ago are still with us.

They have been operating in an ‘easy money’ environment for some time and natural selection has yet to pick them off. Unless they refinance at lower rates risk it is hard to see how fundamentals will improve significantly for such companies. The one thing they do have is time.

I wanted to (at least start) to get a sense for this. The above chart shows the number of 5% plus moves by month of the Pan European High Yield Index, plotted against the 10 Yr Bund Yield. 

It hopefully shows Systematic vs. Idiosyncratic risks. What’s more, you tend to see a decline in the idiosyncratic moves after a dose of yield compression. However – fundamentals will prevail. 

So, it looks like the cost of getting it wrong will increase while at the same time spreads can compress further if our view of IG/ HY compression takes hold.

Fundamentals look to have softened slightly and a continuation into Q3 could put that cat amongst the pigeons – Especially ahead of QE restarting.

We analysed the fundamentals of 300+ issuers and calculated several metrics – leverage, coverage and cash flow.  The number of issuers was roughly 73% of the Pan Euro High Yield Index. Outliers were removed and then the straight average was calculated.

Ideally, in the future, this can be done on an issuer weighted basis as well as digging into the trends seen in specific issuers. High Yield is seeing an increase in data providers and leveraging them for screens and other studies will hopefully deliver more insight.

The table below shows that leverage has increased on average since 2016, with Energy and Transportation showing a decline in leverage at the aggregate level Q2 ’19 vs. FY 18.

Rating-wise, the story is the same. BBs edging higher vs. Q4 ’18 +11% vs. Bs +2%. Which suggests some slippage in quality, plus the influence of new issues.

We use Funds from Operations to look at both the ability of Issuers to pay back debt and in terms of interest coverage. YTD and YoY there is little to cheer about with FFO down across the board. Consumer-facing and cyclical sectors down the most. Ratings-wise, BBs show a steeper decline YTD than Bs but fare much better on YoY and comparison against FY16.

Interest cover at the aggregate level looks relatively healthy, with any “zombies” lost in the mix.  Most segments have seen a decline based on recent history and point to a softening YTD and YoY.

Overall, the moves are not huge – but they are significant. A further decline would represent reasons for increased caution. Overall, the softness does look to be cyclical. Clearly, we have to be mindful of mix when extrapolating to the wider market.

There is an ever-growing list of “known knowns“  to contend with– distorted relative value, aggressive deals with weak covenants, additional financial stimulus, declining margins of error, geopolitics and a softening economy. The key is picking your spots into Q3.

“Complacency” is something that one does not often associate with the High Yield market where it pays to be a skeptic. 

Whilst “Animal Spirits” may not be rampant, there are signs of frothiness. The recent Pinewood Studio is a case in point. Split rated BBB/BB the business managed to print a £550mm deal of which £280mm (51%) was a dividend. 

The deal printed at 3.25%, and after tax that is roughly 2.8%. The cost of equity on the Euro Stoxx Real estate constituents is 6.6%. Pinewood managed to pay itself a dividend at a cost of 2.8%. The flip side is that debt investors are the ones effectively covering the additional risk – it is a zero-sum game.  Pushing back on primary is going to become more and more important in sustaining that margin for error. 

Fundamentals, though, are not flashing red yet, so well-rated dividend deals are a sign of the times rather than a sign of the end of times.  

We remain comfortably numb awaiting our next dose from Dr Draghi, but positioning needs to stack up.  Credit selection remains the number one priority with a view to managing downside. October looks to be a cash-rich month in terms of coupons and redemptions – some of the supply we are seeing now is pre-financing that but technicals look to be supportive near term. QE will drive compression between IG and High Yield, the risk is the fundamentals continue to slip and stimulus fails to keep a lid on volatility. 

Next time, I plan on looking at curves and convexity. You can follow me on twitter @EuroYield.

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