Reloaded & ready to go again

Roll up those sleeves… We are having that pull back in spread markets. That little reminder that markets don’t go in any direction for too long before they correct. We had been in bullish mode for well over two months and the weakness last week was probably a timely reminder of the over-exuberance in the […]

They’re back!

Some more of the same… The big picture for credit has investors concerned about the level of the market and the timing of ‘the’ correction. That big event is unlikely going to occur just yet. Most will safely assume that 2018 is the timing for that and will use the rest of this year to […]

If it was just that easy!

Defeat from the jaws of victory… We came into last week on such high expectations that spreads would continue to squeeze tighter, but we were completely wrong-footed. Not because there was any measurable or obvious better selling cares, or that we had a credit market related event that scuppered those expectations. Nor was it that […]

Soggy end to the week

Playing the game… There was a cautious tone to the markets again and after several sessions with that being the case, we must be thinking in terms of a reluctance by investors to chase the markets deeper into record territory so close to year-end. That certainly seems to be the case for European equities, while […]

Whacking out the deals

Primary bursts into life…

There was no midweek lull in the corporate bond market. The credit market was not for taking a break following a couple of days this week of decent primary activity. We had another bunch of deals keeping investors occupied and feeling a little relieved, as cash balances which need to get absorbed before year-end are doing just that. We might just be full-steam ahead into the Thanksgiving break and €2bn or (much) more of non-financial issuance per day at the moment is getting done.

Some will be advised and/or tempted to wait a while, because conditions will remain just as accommodating in Q1 as they are now. It’s just that there will be a gamut of borrowers to contend with, then all looking to get their funding away early once the new year kicks off – so get it in early. Anyway, we weren’t devoid of issuance as the likes of BASF, Union Fenosa and UPS in non-financials amongst others pitted their wares.

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Tensions rise in Middle East

…but they will soon pass

The markets have had a bullish disposition about them for the best part of three months. Record closes again in the US overnight and a solid rally in Asian stocks, with commodities heading higher helped by that shake-out on the Saudi domestic front along with rising tensions with Iran (oil at 2-year highs) gave us every reason to trade through a rather mixed and eventually weaker session.

A very positive European open was soon faded, with equity indices closing out up to 0.7% lower. It is certainly a case of ‘baby steps’ as far as European equities are concerned, as they make any gains with a more cautious stance versus their global peer groups. And that’s fine, it’s perfectly natural to trade this way and we are hoping that there are no major event-risk driven lurches lower that would ultimately impact the corporate bond markets.

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Record high/low beta credit compression

Warning signs but more to go?…

Such has been the demand for higher yielding credit risk that the outperformance of this part of the credit market has seen a quite remarkable compression between high yield and investment grade valuations. For instance, the difference between high yield and IG spreads is now at a record tight (157bp) with 15bp of that coming in the last month and 110bp of it this year, as measured by the Markit iBoxx cash index (see chart).

The bigger the risk associated with a structure, the greater the performance of it and therefore the larger the compression.

The AT1/CoCo market has been on fire. Of course, when we get to these levels, some are thinking/expecting a pullback. Fortunately, the excess liquidity in the system will likely prevent that from happening, given that the accommodative policy stance is going to unwind only slowly.

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It’s your friend!

Strap on some risk…

US hiring might have come in lower than expectations (261k actual vs 340k expected), but it was a big ‘corrective’ number and the picture remains promising as the economic outlook brightens. We have a firming recovery, the US unemployment rate dropped to its lowest rate for over 17 years to 4.1% – while wage growth also declined (to 2.4% year on year from 2.8% the previous month).

That’s all good news for investors! We think that there ought to be a real zest about the markets because the trajectory of an economy blowing not too hot or too cold is just about perfect at this stage of the economic recovery, along with a drawn-out rate normalisation process.

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Markets react to being dumbed down

By adding a little bit more…

The best we could say about the market right now is that it embraces a reflective mood – thinking about the FOMC just gone, the earnings season, the next catalyst to push us higher, the next Fed chairman, Trump’s tax reforms and more immediately, today’s non-farm payrolls.

At least we had some better activity across the primary market after what seems like an age with several session of little or no supply – or nothing to inspire anyway. Eurozone equities gave a little of the previous day’s gains back, rate markets were still treading water and credit was unchanged to better bid for choice, where the squeeze in spreads is taking us deeper into record territory. That systemic event risk – likely the only thing that can derail the markets – delivering a knockout blow to investors who are just as long as they can be, is seemingly as far away as ever.

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As good as it gets?

No, there’s life in the old dog yet… There was little distraction from the Fed’s rate decision in a session where European markets rallied hard. Equities gained over 1% in some cases, iTraxx Main Series 28 dropped through 50bp, cash credit squeezed some more and rate markets were fairly stable. That’s about as good a […]