Suki Mann

Author Archives: Suki Mann

15th September 2019

Rabbit out of the hat

Credit not the only winner… Mario Draghi is a magician. There’s little doubt left. Judging by the post-ECB rally in risk assets, the great conjurer has pulled it off again. Increasing Eurozone wage growth, the Chinese relenting on pork imports (out of necessity, in our view) amid rising trade-tariff optimism, US retail sales on the […]
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12th September 2019

Draghi: No happy ending

HY/IG compression: Shades of 2016… The President of the central bank might have been a little schackled, but Draghi largely likely got his way in finding some middle ground, enabling him to keep the doves and hawks both content. A compromise 10bp cut on the deposit facility to -0.50% – as well as a tiering […]
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11th September 2019

Boneheads? Hmmm, quite

More sticky plaster, please… Negative rates are not natural and nature has a habit of expunging such aberrations. So, an ECB 20bp rate cut must be in the bag! All that’s left to ponder is whether any accompanying QE is for €15bn to calm the dissenters, or €30bn to give the markets a turbo boost. […]
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10th September 2019

Credit takes a much-needed breather

MARKET CLOSE:
iTraxx Main

49.4bp, +1.5bp

iTraxx X-Over

246.5bp, +7.5bp

🇩🇪 10 Yr Bund

-0.56%, +2bp

iBoxx Corp IG

B+124bp, +1bp

iBoxx Corp HY

B+415bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, +7bp

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

Primary market respite appreciated…

Finally some respite from the September daily deluge of IG non-financial corporate bond deals. And it probably helped stave off a deeper bout of indigestion after having seen €26bn printed in this month’s seven trading sessions. There were deals but nothing like the massive volumes seen since we returned after the summer. We don’t think that the market has run out of steam and can expect a resumption in issuance at likely heavy levels once we are through Thursday’s ECB meeting.

It feels rather dull when primary slows, but it’s a necessary requirement if we’re going to greet high levels of deals without seeing a material widening in secondary and/or lower subscription levels, followed by good performance when issues are free to trade. After all, demand and performance combine to promotes confidence.

Even if the majority of September’s deals are wider in secondary, we seem to have it just right at the moment. We took a relative breather on Tuesday but we know that there is still plenty of sidelined cash waiting to get invested in this market. The ECB will be the catalyst, most likely, for the next leg of the issuance phase.

It might just provide the tonic for secondary spreads to tighten as well – because they haven’t moved much this month. Although that’s a positive given the welter of primary deals, we’re anticipating more than a grind come next week if the central bank restarts corporate bond purchases as part of any QE.

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9th September 2019

Primary Going Gangbusters

MARKET CLOSE:
iTraxx Main

47.9bp, +0.8bp

iTraxx X-Over

239.4bp, +0.9bp

🇩🇪 10 Yr Bund

-0.58%, +6bp

iBoxx Corp IG

B+122.9bp, -0.5bp

iBoxx Corp HY

B+414bp, -2bp

🇺🇸 10 Yr US T-Bond

1.62%, +7bp

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

Records set to be broken…

We’re barely a week into September and we are already looking at records for European credit markets. That comes courtesy of the IG non-financial primary market, but we’re also looking at returns edging higher with each passing week.

Incredibly they are almost into double-digit territory for all fixed income classes. It’s a fantastic effort, just ahead of it becoming odds-on that the ECB (later this week) and the Fed (next week) are about to turn on the liquidity taps.

Government bond yields might have had a decent sell-off a few sessions ago on hopes of a US/Chinese breakthrough and a triumvirate of positive news on the political front which was crammed into a single session. Nevertheless, the former has left us thinking it might be a false dawn – we’ve had plenty of them, while on the politics side there is incredible uncertainty regarding the next move on the Brexit front.

The new Italian coalition might not (likely will not) hold for long. Only the situation in Hong Kong seems to have calmed.

Safe havens have recovered some lustre and central bank action might well be the catalyst to push, for example, that 10-year Bund yield zooming through -0.75% en route to -1.0%. Uncertainty in UK politics is going to take that 10-year Gilt yield to a new record low. A Fed rate cut might be priced in, but cheaper liquidity will prop up US equities and the impact will be to lift all other equity markets.

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8th September 2019

To the ECB, the market expects

MARKET CLOSE:
iTraxx Main

47.1bp, -1bp

iTraxx X-Over

238.5bp, -6.6bp

🇩🇪 10 Yr Bund

-0.64%, -4bp

iBoxx Corp IG

B+123.3bp, +1bp

iBoxx Corp HY

B+417bp, +4bp

🇺🇸 10 Yr US T-Bond

1.56%, unchanged

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

Time for Draghi to step up – Again…

The markets are going to be focused on the ECB this week. Investors have been front-running them for so long, and with Draghi taking his bow in several weeks, we think that the central bank will finally take action – Whatever the protestations of some board members. The market expects.

Even if the political news flow has been better of late (Brexit, Italy, Hong Kong, US/China) and boosted the market, the macro numbers remain dire across the Eurozone. The latest numbers saw industrial production drop 0.6% month-on-month in Germany in July, where the odds are in favour of a technical recession being called come the end of Q3. Now is not the time for the ECB to delay and dither further.

We’re thinking in terms of a 20bp rate cut and a resumption of quantitative easing (with a likely compromise €15bn of purchases per month). It will be a shot in the arm that keeps the zombified Eurozone economy ticking along. But it will be a major boost for those fixed income investors hoping that rates can rally some more and the current performance can be maintained. As for 2020’s returns, it is just too far away to start thinking about!

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5th September 2019

Reading the tea leaves

MARKET CLOSE:
iTraxx Main

48bp, -1.3bp

iTraxx X-Over

245bp, -7.5bp

🇩🇪 10 Yr Bund

-0.60%, +10bp

iBoxx Corp IG

B+122.2bp, -1.5bp

iBoxx Corp HY

B+413bp, -8bp

🇺🇸 10 Yr US T-Bond

1.57%, +11bp

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

It’s all good…

We are looking at record performance for Eurozone government bond markets for 2019. Unless it all falls out of bed – rates sell-off hard. And we just endured a torrid session for rates. Nevertheless, the nature of the beast is such that the sector usually delivers less than 1% or so of total returns in any given year. So those 10%+ of total returns year to date can be considered an option-like performance for this safe-haven plain vanilla product.

Alongside it, there will have been a brilliant AT1 market performance – perhaps in excess of 13% for euro-denominated CoCos. The high yield market will deliver an excellent result for investors (likely 10%+) just as many fret about the macro outlook. Investment grade will follow very close behind just as the headlines scream ‘over-valued, negative yields and a bubble waiting to burst’.

Inflows continue to be attracted to corporate bond funds with investors and asset allocators chasing previous and more performance. There has been a constant drum banging against adding corporate bond risk here, but if we can contain economic growth at these lower levels with interest rates so low, then rating transmission and default risks will remain subdued. IG investors will be repaid in most cases at maturity and the high yield market fraternity isn’t going to be too far behind.

The low (and declining) rate environment has boosted borrower plans to get more debt on board, and they haven’t been backward in coming forward – in the IG universe anyway. That debt issuance in some cases is for funding M&A, little of it is for investment but the vast majority of it is prudence – that is, refinancing or pre-funding future obligations at giveaways levels. Danaher’s blockbuster 5-tranche, €6.25bn offering on Tuesday was a case in point on the M&A financing front.

For the year to date, we are now up at €220bn and that matches the €220bn issued for the whole of last year – which was blighted by many periods of political event risk. The current run rate of IG non-financial deals will have us closer to €240bn by the end of the third quarter. Should that happen, it will take us to within touching distance of that annual €285bn (2009) record level come the end of 2019.


Glut, glut, glut

Primary markets delivered a glut of deals in a bumper session for IG non-financials. The sluice gates well and truly opened. And it was non-financials in investment grade where the day’s action was.

Wirecard lifted €500m in a 5-year at midswaps+110bp (-25bp versus IPT) with Continental also taking €500m in a 4-year maturity at midswaps+55bp (-35bp versus IPT). BT went for dual-tranche funding in the form of a 6-year transaction at midswaps+95bp (-20bp versus IPT) for €650m and a 10-year deal at midswaps+140bp for €750m (-15bp versus IPT).

We also had Snam in a 4.7-year deal for €500m at midswaps+55bp (-15bp versus IPT) and a 15-year tranche at midswaps+103bp (-27bp versus IPT) for €600m. FCA Bank was the day’s biggest tranche, as the borrower took €850m at midswaps+98bp in a 5-year (also -27bp versus IPT). Next up was DS Smith’s 7-year for €500m at midswaps+135bp (-35bp versus IPT) with Origin Energy taking 10-year funding at midswaps+120bp (-20bp versus IPT) for €600m.

We’re up at €17bn for the month so far for IG non-financial deals with not even a week gone for the month. Last August’s deal flow totalled €33bn.

There were other deals from Blackstone which came in a dual-trance for a combined €1.1bn (4-year €500m at midswaps+100bp and a 9.5-year at midswaps+200bp), while Leaseplan issued €1bn in a 4-year at midswaps+75bp (-15bp versus IPT).


What a session!

Credit market investors might have been glued to the primary market, but the big market moves were in rates and equities. In the UK, hopes by the market that a no-deal Brexit would be avoided saw Gilts sell off, the 10-year yield up at 0.59% at the close and top by 12bp in the session.

Agreed talks between the US and the Chinese in early October, a decent ADP payroll print and a solid ISM service sector print for August saw the 10-year US Treasury bounce 11bp higher to 1.57%. The S&P rose by 1.3%, as at the time of writing.

And, of course, the lessening in political tensions in the UK, Italy and Hong Kong all helped the risk-on mood during the session. Bunds were only going one way (lower in price) – and the yield rose to -0.60% (+10bp).

Equities rose across the board as they went up to 1% in Europe, with the strong sterling rally seeing to it that the FTSE was lower (-0.55%).

The credit indices were also factoring in the better mood and the cost of protection dropped. iTraxx Main declined 1.3bp to 48bp while the X-Over index managed a 7.5bp drop to 245bp.

The Markit iBoxx IG cash index was just 1.5bp tighter at B+122.2bp and obviously returns will have taken a hit as the underlying sold off. Still, the Street was tightening up prices and spreads were tighter across the board. The AT1 market was better (index -13bp, B+510bp) and the HY cash index closed 8bp tighter at B+413bp.

Have a good day.

4th September 2019

Anticipating HY/IG yield compression

MARKET CLOSE:
iTraxx Main

49.3bp, -1bp

iTraxx X-Over

252.5bp, -4.7bp

🇩🇪 10 Yr Bund

-0.67%, +5bp

iBoxx Corp IG

B+123.6bp, -0.5bp

iBoxx Corp HY

B+421bp, -5bp

🇺🇸 10 Yr US T-Bond

1.47%, unchanged

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

The ECB will be the catalyst…

Don’t let the significant rally in European rate markets blur the issue. The crucial ECB meeting is just a week away, and the expectation in the market has been that they deliver a rate cut as well as some €15bn – €30bn per month of QE. Investors have been in ‘front-running’ mode. There has been a push of late for -0.75% on the 10-year Bund (we have got to -0.743%), while we happen to believe -1.0% is the next stop.

Spanish 10-year debt yields (now at 0.16%) were just last week in single digit territory – incredibly – while Italian debt has felt a massive reprieve on news that a new coalition government has been agreed, and now offers just 0.83% (almost -100bp in a month!). But what about credit, and that compression between the high yield and investment grade markets? It’s worth another look.

In Tuesday’s note, our high yield expert commentator George Flynn went through the technical dynamics specific to the market as well as highlighting the pitfalls investors face if they fail to do the appropriate credit work on their investment choices. Nevertheless, the market has performed and we think can gain some positive spread momentum through the final quarter, especially if the ECB announces corporate bond purchases as part of any QE purchases.Continue reading

2nd September 2019

That’ll do nicely

MARKET CLOSE:
iTraxx Main

48.8bp, unchanged

iTraxx X-Over

250bp, -3bp

🇩🇪 10 Yr Bund

-0.69%, +1.5bp

iBoxx Corp IG

B+122.3bp, +1.5bp

iBoxx Corp HY

B+424.5bp, unchanged

🇺🇸 10 Yr US T-Bond

1.50%, unchanged

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

Fixed income performance continues to shine…

Equities have, at times, buckled under the strain of the US/China trade headlines. Corporate credit seems to be losing its head in a fog of negative yields just as primary debt offerings print with zero coupons. Price now matters more than yield. The rates market has become the investment for choice as investors front-run the central banks pushing prices higher, and yields have felt the strain of the demand. Who would have thought that we’re talking in terms of option-like returns for Eurozone government bond market investors so far this year?

Normally an unexciting market, lumbering and low or no returns (easily less than 1% typically in any given year) but Eurozone government bonds have rallied hard and put 10.5% or more of performance in the bag for investors for the year to date. They added 2.7% in August alone. Clearly, fixed income came out tops in August, with all markets returns higher while equities sagged in comparison – for a change.

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1st September 2019

Stick or twist?

MARKET CLOSE:
iTraxx Main

48.8bp, +0.7bp

iTraxx X-Over

253bp, +0.7bp

🇩🇪 10 Yr Bund

-0.71%

iBoxx Corp IG

B+120.8bp, +0.7bp

iBoxx Corp HY

B+425bp, -1bp

🇺🇸 10 Yr US T-Bond

1.50%

🇬🇧 FTSE 100

7367.46, -6.00
🇩🇪 DAX

12468.53, -3.30
🇺🇸 S&P 500

3007.39, +0.86

Politics and trade war whip up the perfect storm…

Much of it doesn’t make sense, but on we go – and into uncharted territory, so anything is possible. Politics and trade dominate the landscape, leaving macro on the precipice. Brexit, Italian politics, Hong Kong, US/China, Kashmir and Argentina’s default are all deserved of investors’ attention. The resulting and predictable equity volatility – particularly derived from the worsening US/China trade situation – has seen US markets fall from their record highs. The bigger story is in rates. The government bond rally has seen yields collapse in August, with curves flattening and/or inverting as markets position for the next round of central bank activity. It has seen Eurozone government bonds return 10.5% in 2019 so far!

The US Treasury curve has flattened or inverted across the various metrics, which would usually indicate that a recession is just around the corner. Further action is imminent from both the Fed and ECB as they try and avert more downside and recession. A (likely) negative GDP print in Q3 for Germany would signal a technical recession for her economy, while the 10-year Bund yield has plummeted in August – and by 28bp at one stage, to record a historic low of -0.728%.

Investors, though, are lording it from a performance perspective, especially in fixed income with returns heading for the moon. It’s great for 2019, but total return markets will resemble a dustbowl in 2020.

In the safest of haven debt markets (government bonds), where yields are embedded deep in negative territory, it has now become extremely difficult to envisage the process that sees a return to normality (positive yields). Thus negative yields – across entire sovereign curves – are something that we need to get used to. The traditional methods used to attack the malaise in macro and markets will likely fail in producing the desired results, in our view.

So as fresh blood (more liquidity) is injected courtesy of the ECB, those Bund yields – dare we say it – are heading lower. In credit, despite having backed-up in August amid high levels of equity volatility, we think that IG credit spreads will head into record territory. There is some way to go, but we can expect a ratchet tighter once the central bank announces its intentions next week.

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