Category Archives for "Fixed Income Market"

16th September 2019

Event risk swatted away

Markets resilient as geopolitical risks rise… The attack on Saudi oil installations over the weekend ought to have put a bit more of a dampener on the week’s opening session, as markets took up only a moderately defensive positioning. Oil prices rose by 10% and there might well be a medium-term impact on global macro, […]
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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

MARKET CLOSE:
iTraxx Main

45.0bp, -4.6bp

iTraxx X-Over

235.5bp, -13.4bp

🇩🇪 10 Yr Bund

-0.51%, +5bp

iBoxx Corp IG

B+122bp, -4bp

iBoxx Corp HY

B+402bp, -14bp

🇺🇸 10 Yr US T-Bond

1.77%, +4bp

🇬🇧 FTSE 100

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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 system for banks’ holding of excess liquidity – and €20bn of QE from November is good enough. The open-ended nature of the purchases is going to boost that hunt for yield. Hold on tight.

The markets might be a touch disappointed that it wasn’t 20bp and €30bn, respectively, but the ECB did the very least we could have reasonably expected. Fixed income markets are not going to fall out of bed on this news. Thus a reasonable interpretation from seasoned investors on the day’s events will be that there is more to come in 2020. In fact, there is an inevitability about it all.

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11th September 2019

Boneheads? Hmmm, quite

MARKET CLOSE:
iTraxx Main

49.6bp, unchanged

iTraxx X-Over

248.9bp, +2.4bp

🇩🇪 10 Yr Bund

-0.57%, -2bp

iBoxx Corp IG

B+126bp, +2bp

iBoxx Corp HY

B+417bp, +2bp

🇺🇸 10 Yr US T-Bond

1.74%, +4bp

🇬🇧 FTSE 100

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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.

For investors, we think it’s a case of ‘buy the rumour, sell the fact’ – or, just keep buying. For sure, if the ECB announces intentions to get involved, the recent sell-off in rate markets will be reversed and -0.75% will be back in view for the 10-year benchmark Bund yield, with -1.0% coming thereafter. The ECB will provide the catalyst/answers on Thursday.

We’re about to find out how motivated the central bank is to give the economy what might be a final push in its attempt to lift it out of the doldrums, or – at worst – it’s a case of stemming any further declines as global macro continues to slow.

Continue reading

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

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

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

3rd September 2019

2B or Not 2B (Free Content)

Finding value in the high yield market…

Just how much have rates driven returns in the quality end of high yield?  How much do spread returns in the Investment grade market explain returns in the BB space? Are BB’s cheap? Where could spreads go?

There has been much talk about the proportion of negatively yielding debt – even in European High Yield. Hopes are for the ECB to step in with a yield crushing solution in the coming weeks. Meanwhile, economic data has been softening, especially when you look at Germany and China.

Year to date BBs have outperformed single Bs by 192bps when looking at the Bloomberg Barclays High Yield Eur Index returning a not too shabby 9.84%. The BBB Euro Corporate AGG as returned a whopping 8.84% year to date, also outshining single Bs.

The Bloomberg Barclays Bundesrepublik Deutschland index has returned a 9.41% YTD. Who cares about credit risk??

Figure 1: Selected Stats for Eur Bloomberg Barclays Indices
Source: Bloomberg, CreditMarketDaily.com

Well – you should – especially if you are sitting on a decent year to date return. BBs are synonymous with quality, liquidity and low defaults. And yet we have seen Casino, Steinhoff, Dia and GE, to name a few, all nosedive in rating and price – credit risk is real. Liquidity is increasingly difficult to source, and gap risk has increased significantly over the past 12 months. If the name of the game is riding yields until they are negative then BBs certainly benefit from higher rate sensitivity, but from a credit standpoint are we doubling down?  Calculating the R Squared of Excess Returns against Total returns for the BBB/BB/B corporate indices tells us just how much spread performance drives returns.

Figure 2: R Squared of Excess and Total Returns and Return Summary for Eur Bloomberg Barclays Indices
Source: Bloomberg, CreditMarketDaily.com

On average 2010-2018 spread looks to explain 13.44% of IG returns, for BBs and Bs the numbers are 29.62% and 34.4% respectively. The LTM figures are much higher 29.61%, 35.92% and 45.65% for BBBs, BBs and Bs respectively This is mainly a function of including 2018’s sell-off. Looking at the Bar chart you can see that spread has a larger influence on returns in times of stress – 2011, 2015,2018.

So, having enjoyed the ride is it time to take chips off the table? From a credit standpoint earnings have yet to take a turn for the worse. However, the “known” unknowns list is long now. Trump’s ability to send Xover wider one day and tighter the next is a prime example. Systematic factors likely demand caution, with idiosyncratic risk, the risk at the heart of the High Yield market yet to be influenced by the overall economy.

The linkage between rating buckets when it comes to spread performance is significant.  Regressing weekly Excess returns of BBBs and BBs yields an R squared of 87%, and with BBs and Bs the figure is slightly lower at 80% reflecting the step up in default risk. Doing the same exercise on a total return basis the R squared regressing BBBs against BBs is much lower 37.5% compared to 77.8% for BBs vs. Bs.

Figure 3: R Squared between Rating Buckets
Source: Bloomberg, CreditMarketDaily.com

The inference is that credit risk explains a large part in the return of BBs vs. BBBs.  A key technical, demand from the “Investment Grade tourist”, is unlikely to endure in the context of spread underperformance. The Mean weekly return for BBs and BBBs 2010- to date are c. 33 and 17bps respectively, and BB excess return volatility is roughly 3x that of BBBs.

Looking at the spread ratio of BBs to BBBs it is hard to argue that BBs are cheap. The Ratio has averaged 1.97x since 2011 and currently sits at 1.7x. In the Dec-18 Sell off the ratio blew out to 2.56x. For context, this is roughly a 200bp widening relative to the BB index’s FY18 starting spread of 148. BBB spreads started the year at 68bps and ended at 148.

Figure 4: Ratio of Swap OAS for BB and BBB Eur Bloomberg Barclays Indices
Source: Bloomberg, CreditMarketDaily.com

So relative to BBBs, BBs look relatively rich and certainly the downside volatility appears to be significant enough to perhaps take some chips off the table.

When it comes to BBs vs Single Bs the decision to take chips off the table come down to your willingness to take more credit risk. Doing a similar exercise with Bs and BBs the average weekly excess returns 2011- to date are similar +33bps vs. +35bps. Volatility of returns is also closer (but not insignificant) with Bs having a volatility roughly 1.6x that of BBs.

Figure 5: Ratio of Swap OAS for B and BB Eur Bloomberg Barclays Indices
Source: Bloomberg, CreditMarketDaily.com

Looking at the spread ratio Single Bs vs. BBs the current value of 1.82x is practically the same as the 2011- to date average of 1.81x. Here the relationship looks fairly valued.

Credit selection is a somewhat consensus mantra. Given the margin for error at current spreads this makes perfect sense. Being overweight in the current environment assumes The ECB’s “Bazooka 3.0” will drive spreads tighter and yields lower, with the softness macro being more of an issue come 2020.

With 3 months to year-end and a significant YTD return and increasing uncertainty, taking some risk off is extremely tempting.

The CreditMarketDaily view is that we see further compression in High Yield vs. IG. Taking profits in BBs to rotate into Bs with positive credit momentum is a way to position for near term central bank action. Deep value – if your remit allows- is also a way to position for upside, given the nature of special situations they reduce your overall correlation with the wider market.       

An underweight vs. the benchmark assumes that “Bazooka 3.0” does not cure all and that the cyclical decline worsens ahead of expectations. Given the risk-on – risk-off volatility maintaining a neutral position locks in returns and allows for some upside assuming credit selection is good.

Below is a spread summary covering November 2010 to date for the Bloomberg Barclays indices discussed. “Distance from the wides” shows how far current levels spreads are from the wides of the range.

A friend of mine likens the High Yield Market to an elastic band – the more it is stretched the more violent the snap back. If you were holding that elastic band right now, I suspect you would be holding it as far from your face as you can manage. It might not be fully stretched yet, but it has the potential to deliver a sting. Credit selection and an avoidance of outright beta should lessen it should we get the snap.

A tightening to the lows would result in an additional 2.4%,1.93% and 2.86% for the BBB, BB and B indices respectively. What gets us there is probably a combination of ECB not disappointing, continued corporate strength, Orderly Brexit and China trade tensions easing.

Impossible? No. Improbable? Maybe. Likely? You Hope.

Figure 6: Spread Summary Eur Bloomberg Barclays Indices
Source: Bloomberg, CreditMarketDaily.com