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Monthly Archives: March 2020

31st March 2020

🗞️ Corporate bonds: Pile ’em high, sell ’em cheap

MARKET CLOSE:
iTraxx Main

98.1bp, -1bp

iTraxx X-Over

572.1bp, -8.4bp

🇩🇪 10 Yr Bund

-0.48%, +5bp

iBoxx Corp IG

B+252bp, -3bp

iBoxx Corp HY

B+782bp, -24bp

🇺🇸 10 Yr US T-Bond

0.68%, +1bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

But it is a quarter to forget…

In the end we managed to finish in the black but there’s a feeling that we might be running out of steam. Having said that, it has been a super recovery-like period for the markets. It’s a case of too little, too late because it has been a devastating quarter for investors. We suspect that the turnaround is going to be immense, though, given the number of players looking for the ideal/opportune time to pile back in.

The rocket fuel is in place and being deployed (from the various stimulus packages) and will ultimately go a long way in assisting the recovery. Get the virus’ peak right (in the US), and one might just pick the bottom.

In the corporate bond market, the final session had us take down another flurry of deals, this time with 8-tranches from five IG non-financial borrowers. Equities added a percentage point or so. Oil edged off its recent lows. Credit spreads were stable. Q2? More of the same to start would be welcome.

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30th March 2020

🗞️ Corporate bonds: Help needed for the little guy

MARKET CLOSE:
iTraxx Main

98.1bp, +4.2bp

iTraxx X-Over

580.5bp, +4.3bp

🇩🇪 10 Yr Bund

-0.53%, -5bp

iBoxx Corp IG

B+255.4bp, +1bp

iBoxx Corp HY

B+806bp, +12bp

🇺🇸 10 Yr US T-Bond

0.66%, -9bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Good riddance to Q1, but will Q2 offer hope?

The first day of calm after 3 weeks. It doesn’t feel right. The S&P didn’t hit limit up/down and EM bonds were not moving in a 5/10 point range.

The enemy has been at the gates, though. Fund managers have been propped up against the door, stopping investors from breaking it down and getting their cash out from the various investment funds. That door is always too narrow when everybody wants to exit.

The ECB might have widened the door for the investment grade markets, but the orphaned markets are left to fend for themselves. For instance, the primary market is open, but well-known, large, hitherto solid, well-rated corporates are the only ones that can print – and for that, they are paying up.

Performance-wise, we are sitting on total returns (iBoxx) in IG credit of -6.1%, AT1 -18.3%, HY -15.9% and IG sterling of -6.0% for the year to date. Hard to imagine that it’s actually been worse. Last week’s huge rally in risk assets following the launch of those stimulus programmes – and now a rally in the underlying – has saved the day!

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29th March 2020

🦠 The Covid-19 credit gimme trade

MARKET CLOSE:
iTraxx Main

93.9bp, +8.5bp

iTraxx X-Over

576.2bp, +60.9bp

🇩🇪 10 Yr Bund

-0.47%, -10bp

iBoxx Corp IG

B+255bp, -1bp

iBoxx Corp HY

B+803bp, -26bp

🇺🇸 10 Yr US T-Bond

0.67%, -14bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Event-risk to offer more opportunities…

It looks like the IG corporate bond market is healing, albeit leaving a nasty scar. Corporates are playing the short game, borne from a necessity of shoring up balance sheets – and paying up for it. Of course, some of their justification for a print comes from the still historically low coupon payments, but they’re going to decline again – and stay low for years to come. These corporates could afford to wait.

Investors are playing the longer game. We think that the IG issuance is effectively akin to distressed borrowing given that the entities issuing are rock-solid credits, unlikely going to default or see ratings culled as a result of this recession.

Low policy rates forever means demand for this type of higher-rated instrument (paying more than the ‘risk-free’ rate) is the ‘gimme trade’ of the crisis.

That is, the likely V-shaped recovery is going to see spreads on some of the issues tighten by 100-150bp (some are already well on the way). Investors see that and have been falling over themselves to get their hands on the issues. This is 2009 all over again.

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26th March 2020

🗞️ Great rally, but there should be more opportunities

MARKET CLOSE:
iTraxx Main

85.4bp, -3bp

iTraxx X-Over

515.3bp, -15bp

🇩🇪 10 Yr Bund

-0.37%, -3bp

iBoxx Corp IG

B+256bp, unchanged

iBoxx Corp HY

B+804bp, -25bp

🇺🇸 10 Yr US T-Bond

0.83%, -3bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Better to be safe than sorry…

The opening of a window and ‘hey presto!’, there is no shortage of borrowers jumping through it, albeit paying up to get deals away. We don’t think that, perhaps down the line, it is going to be seen as a panic move even if the companies issuing do not have a liquidity problem and are unlikely going to have one.

We do, however, think that the issuance will be seen as a good opportunity to get some additional cash in, to beef up and maintain a conservative balance sheet and preserve ratings.

The same goes for investors. Buy in haste, repent at leisure? We are beginning to think maybe not. These primary market clearing prices are great levels coming after an extended period of being starved of decent spread through several years of low rates, and central bank manipulated markets. That’s still happening.

There has been a huge level of price discovery, too – an excuse to go out with wide indications and then ram the final pricing tighter. We’ve seen 20 – 60bp of tightening in the final pricing versus the initial guidance and books have been anywhere between 7 – 10x oversubscribed for many of the deals (22x for the Air Liquide deal on Thursday).

One will rarely pick the bottom of the market. Given the various Covid-19 trajectories in the US and Trump’s hitherto flailing response, there is a strong argument for erring on the side of caution.

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24th March 2020

🌄 First of Many False Dawns

MARKET CLOSE:
iTraxx Main

99bp, -19bp

iTraxx X-Over

607bp, -98bp

🇩🇪 10 Yr Bund

-0.33%, +5bp

iBoxx Corp IG

B+261bp, +2bp

iBoxx Corp HY

B+883bp, -29bp

🇺🇸 10 Yr US T-Bond

0.82%, +5bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Timing is everything and nothing…

Are we reading this wrong? An extraordinarily positive day in equities, and a clutch at the proverbial straw of hope of a turnaround. There is a massive fiscal boost on the way in the US to augment the monetary one as well as the open-ended Fed purchases already announced. That will surely light the blue touch paper.

The virus will eventually be cured. And the ugly bit in the middle is an opportunity, isn’t it? That most likely will be determined on the shape of the recovery. The letters are all jumbled up, but the markets are pricing in a V-shaped recovery, not a U, W or L.

The borrowers hit the screens and investors piled in. The deals were cheap as chips. Irresistible. After all, the spread market had shifted/widened massively. It felt as if it was business as usual in the corporate bond market. New deal activity was bursting at the seams.

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23rd March 2020

🗞️ Pyrites at the end of the primary rainbow

MARKET CLOSE:
iTraxx Main

118bp, unchanged

iTraxx X-Over

705bp, +20bp

🇩🇪 10 Yr Bund

-0.38%, -4bp

iBoxx Corp IG

B+259bp, +10bp

iBoxx Corp HY

B+913bp, +25bp

🇺🇸 10 Yr US T-Bond

0.77%, -17bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Closing for business…

Another day goes by and it was another decent leg lower in for risk assets. Even with the Federal Reserve going all-in, becoming the ultimate back-stop bid for fixed income markets, failed to prop up risk markets. Classically, it ought to have translated into some material support across those very markets. It didn’t, coronavirus doesn’t listen, and we d0 not foresee see any significant improvement in confidence in risk assets anytime soon. Next up, though: the cavalry.

But the virus will hold out against it. The Republicans and Democrats can’t quite agree a Covid-19 economic package just yet. Until they do, we are unlikely going to establish any sort of floor for the markets. It’s amazing that we do continue to go lower, because the Germans also signed off on a €750bn package designed to help support stricken domestic companies, as well as including a chunk for additional social aid.

Credit markets are not spared – far from it. They continue to drift or ratchet wider (spreads) stunned by illiquidity in the secondary market and a huge fear of the unknown for this market once macro at least stabilises. That’s some way off, meaning that there is a lot of pain yet to come.

Primary issuance, if a window opens, is likened to being lured by a pot of fool’s gold. Plenty have (previously) got sucked in.

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22nd March 2020

🗡️ Catching a falling knife

MARKET CLOSE:
iTraxx Main

118bp, unchanged

iTraxx X-Over

685bp, +8bp

🇩🇪 10 Yr Bund

-0.34%, -10bp

iBoxx Corp IG

B+249bp, +2bp

iBoxx Corp HY

B+882bp, unchanged

🇺🇸 10 Yr US T-Bond

0.88%, -24bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

UK goes for broke, others to follow…

In a last throw of the dice, Britain has closed for business. Encouragingly and correctly, the fiscal response has been immense, unprecedented in its size and nature and broken many a financial taboo. A volcanic-like explosion of liquidity and support all being necessary as the country (and world) heads into hibernation mode.

The economic impact of the pandemic will see the negative slope on the way down. It looks like we are going to see atrocious double-digit numbers for GDP in Q1 and Q2 (deep recession), while the upward slope will go a long way to correct it. Once we see the evidence that the latter can happen (development of a successful vaccine, for example) we will see the markets fly, and it could be a huge rally. The numerous fiscal largesses will make sure of that.

It is going to be some correction. After all, just look at where we are year to date: FTSE -31%, Dax -33%, S&P -29%, IG credit -6.6%, HY -18.8% and AT1 -23.3%.

That’s something to look forward to. For now, stay defensive – although the ability to trade at reasonable prices has been severely curtailed. Given the huge levels of uncertainty ahead, there is little reason to get involved. Why would you?

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19th March 2020

💺 That’s it, sit back and wait

MARKET CLOSE:
iTraxx Main

118bp, -17bp

iTraxx X-Over

677bp, -23bp

🇩🇪 10 Yr Bund

-0.25%, -3bp

iBoxx Corp IG

B+247bp, +3bp

iBoxx Corp HY

B+884bp, +24bp

🇺🇸 10 Yr US T-Bond

1.07%, -19bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Time for a sober re-assessment…

They’re coming thick and fast – and with increasing regulatory. The Fed, BoE, ECB, EU, ECB and BoE again. Rate cuts, asset purchases, fiscal splurges, mantras of ‘whatever it takes’. My, whatever next, helicopter money?

For the investment grade corporate bond market, the crisis in performance for investors probably sees a chink of light at the end of the tunnel. The ECB unleashed its buyer-of-last-resort backstop bid and this has/will go some way in assuaging the worst fears for most of this section of the corporate bond market. The central bank will absorb the outflows as nervous and/or forced sellers unload their holdings and we might have found a floor in spreads.

The very nature of their business models/ratings allows for investment grade corporates – from a credit perspective – to withstand a period of weakness in macro. There will be the obvious and well-documented casualties along the way, but the IG market will be able to get through the spring/summer economic weakness – even if macro has fallen off a cliff.

IG has reacted positively but tentatively but we’re not sure it necessarily helps the primary market establish a ‘clearing’ level for new paper. More interestingly, how will the HY market’s direction map out?

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18th March 2020

🙈 Spread Charts Have to be Seen to be Believed

MARKET CLOSE:
iTraxx Main

135bp, +18bp

iTraxx X-Over

700bp, +100bp

🇩🇪 10 Yr Bund

-0.23%, +20bp

iBoxx Corp IG

B+245bp, +25bp

iBoxx Corp HY

B+860bp, +65bp

🇺🇸 10 Yr US T-Bond

1.25%, +25bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

Helicopter money on stand by…

We’re beginning to see the first vestiges of the coronavirus storm’s impact on macro with data emerging ex-China, and the readings are going to look as bad (if not worse) as we might have feared – with big demand/supply-side shocks. The current numbers have merely set a marker for what’s to come.

To their credit, authorities have reacted – on an unprecedented scale. And that initial market reaction (on Tuesday) might have left many to think that, having essentially kitchen-sinked it, we would have been close to establishing a floor. That exuberance was completely offside. The almighty sustainable bounce looks like it is some time away.

Unfortunately, we’re now getting the first reports of second wave effects emerging in Asia, suggesting possibly flawed strategies around suppressing the virus. It might be that until we develop a vaccine or develop a herd immunity (going along with the science), then we potentially remain at risk. So market volatility is with us for a while, and we are likely to discover a few more floors yet.

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16th March 2020

🦠Corporate Bond Market March 2020 in Charts

MARKET CLOSE:
iTraxx Main

120bp, +8.5bp

iTraxx X-Over

609bp, +83bp

🇩🇪 10 Yr Bund

-0.47%, +12bp

iBoxx Corp IG

B+205bp, +17bp

iBoxx Corp HY

B+747bp, +87bp

🇺🇸 10 Yr US T-Bond

0.74%, -21bp

🇬🇧 FTSE 100

5897.76, (-1.54%)
🇩🇪 DAX

12313.36, (-0.54%)
🇺🇸 S&P 500

3271.12, (+0.77%)

—-

August 2020 Update: All current credit spreads charts for 2020 can be found here: Investment Grade | High Yield

—-

Don’t stop now…

It’s real. We are in the midst of a global financial systemic crisis borne from a global health Covid-19 virus-related pandemic. The virus does not understand monetary and fiscal easing as it continues its savage path around the world. The easing measures are in place to try to limit the economic downside. They might help, but likely only at the margin.

However, it feels as if – and is quite likely that – we haven’t seen anything yet. Once the whole of the US retrenches (locks down) and we see the same just about everywhere else, there is more downside to come in markets. This financial/health crisis likely doesn’t end by Easter. We are not even in the exponential phase of the diseases spread in many jurisdictions.

V, U or W potential macro recovery shapes aside, we just might need to have another look at the global ‘business model’ of the past 40 years and the culture that went with it. The financial devastation from this crisis will be immense. There will be huge consequences associated with bailing out the corporate sector, for example.

The corporate bond market has taken the same hits as every other risk market. But it has hitherto been spared much of the severest of body blows that have affected equities because of its illiquidity and difficulty in finding a clearing price (if there is one).

The very nature of the structure of the market – corporate balance sheet ‘strength’ allows for debt servicing for a while – means that there is a lag before we see which entities will be caught as the tide goes out.

That fear and panic means that spreads have gapped. There’s an oft-used phrase that ‘the market is broken’. Well, it is.

The shape of the credit curve’s spread trajectory, uncannily, is following the same exponential curve trajectory that the coronavirus’ path is taking once it spreads in any given country. The recovery will come too, but once we survey the corporate casualties, the recovery trajectory might not be as symmetrical.

The corporate bid lists are out – aka 2008, for those who remember. As things stand, the market is offered only and there is barely a (decent) buy interest for a bond in sight. Secondary cash market liquidity is shot. We’re seeing a massive weakness in spreads as a result, exacerbated by that illiquidity. But we’re not at 2009 levels, yet – and we might not get there in the main corporate bond markets. It’s too early to tell.

The chart below shows how the euro-denominated IG spread market has moved this year, and, at the close of business on March 16th, the IG spread had gapped further to B+205bp, and are 103bp wider now this year. Returns continue to decline and currently sit at -3.4% in the year to date. We don’t think spreads in euro IG will test the 2009 wides.

High yield markets have similarly felt extreme weakness. The correlation with equities and macro is greater for these high leveraged sub-investment grade rated companies. The index is bp wider at B+747bp (March 16th) so far in 2020 (+400bp), after a 87bp widening in Monday’s session. Once again, we are unlikely going to test the record wides.

That suggests a default rate in excess of 8%. The massive easing in policy that we saw in 2008 following the financial crisis managed to limit the global default rate to below 13%. We would think that the market’s massive expansion in the period since (weaker covenants, more lower rated entities etc) will quite possibly see the default rate jump close to those levels. How far the rate eventually jumps will depend on the macro recovery dynamic and the level of government assistance given to companies.

The contingent convertible product is designed to fail and not trigger a bank default in extremis. And they will, in some cases, fail – perhaps in many situations. The 15% returns of 2019, and the 3%+ returns in the period to mid-February this year have all been undone by Covid-19.

In the opening session of this week alone, the AT1 iBoxx index widened by 240bp to a record wide of B+1084bp! We look for the index to widen to B+1500bp at least. Current returns are -16.6%, year to date. Awful.

We’re yet to reach peak virus in the UK. That isn’t too far away and it is likely that the worsening headlines around that will continue to see a very weak corporate bond market. We don’t think, as in the euro IG market, that we will necessarily see the record wides observed in 2009 in the sterling market, however. The index closed at B+234bp (+23bp) on Monday, returning -4.7% this year.

All the data is supplied by Markit iBoxx

There might have been a partial recovery in European equities into the close, but we didn’t see any of that in the US. It went from bad to worse. The Dow was 3,000 points lower (-13%) and the S&P -12% at the close of play. Losses accelerated after Trump gave an erratic press conference towards the end of the session. The VIX was 25 points higher at 82%!

Other markets saw the FTSE close 4% down, the Dax -5.2% with most other European bourses lower by in excess of 5%. The same again is likely on Tuesday if only to play catch up to the losses in the US.

Rates were better offered across Europe where the yield on the 10-year Bund rose to -0.47% (+12bp) and that was replicated across most European government bond markets, but the US Treasury market was better bid, with yields declining in the 10-year to 0.74% (-21bp).

Liquidity in the credit market came courtesy of the default swap market. And investors were busy buying synthetic protection which saw iTraxx Main up at 120bp (+8.5bp) and X-Over over 80bp higher at 609bp.

We’ve added a current yield calculator for those of you who might find it useful.

Good luck.