Credit Market Daily #12

07-Sep-22

Good Morning!

Credit:

High Yield

European High Yield ended the day small up. There was little in the way of reporting – Enquest reported a good set of H1 ’22 numbers with relatively high oil prices supporting free cash flow and deleveraging.

In terms of performance the Bloomberg Barclays Pan European Index returned a modest 0.2% on the day with single Bs outperforming returning 28bps vs. BBs 18bps.

This modest perfromance was in contrast with the GBP index which returned 60bps on the day and the US which ended some 22 basis points lower, following the risk off tone in the US.

1 Month returns for EUR, GBP and USD High Yield are now -2.79%, -4.23% and -3.32% respectively.

In terms of leaders and laggers – using the Markit Iboxx Indices – the winners on the day were GBP Consumer names which should benefit from UK government aid expected this week – Iceland, Asda and Pure Gym all up over 1.5 points on the day.

Leaders and Laggers

CDS indices: Xover rallied some 15 basis points – outperforming european Equities somewhat.

With the index roll in the next 2 weeks there should be an increasing technical downward pressure on spreads – the index looks to be opening wider by c.6 basis points this morning and we would expect this to drift wider with equities if futures are anything to go by.

Relative to its IG main index Xover continues to outperform since the end of July when the Xover:Main spread ratio was c. 5.09x. The current ratio is sitting around 4.89x vs. a 10yr average of c.4.6x.

Investment Grade

It was quite the day in Investment Grade where issuanace took off in Euros and GBP. We counted 12 corporates issuing some €6.35bn with the majority pricing better than their initial price talk.

Whilst it is generally the norm to see new issues price with lower spreads/ coupons than initially advertised the fact that it is acheiveable when so much uncertainty abounds tells you that there is appetite for risk.

In GBP we had 2 sterling tranches of a 3 tranche deal (the other in Euros) from Orsted (Baa1/ BBB+/ BBB+) a £375m 12yr Fixed note and a £575m 20yr note.

Sainsbury’s bank came with a Tier 2 GBP bond which priced at a yield of 10.5%

The issue looks to be unrated and commentary from one sell side bank as to why the yield is so high was “Potential explanations for the high coupon could be that Sainsbury’s Bank was for sale recently, but this failed, so some strategic uncertainty around the issuer. Also, small issue, which won’t attract the large GBP players. And last but not least – unsecured consumer and credit card lender, seems not flavor of the moment.”

Looking ahead – Anglian Water, Covestro and Ubisoft are in the market today.

The fact IG markets are open is in stark contrast to High Yield.

There is a great web page here – that shows you the YTD issuance trends for IG, High Yield, Loans and Equity. Long story short High Yield issunace is down c.7/% YoY whilst IG issunace is just down 16% Globally.

Rates

Rates took quite the pasting yesterday. the 10yr Gilt is trading at around 310 basis points, the 10yr Bund 163 basis points and the 10 Year treasury 335 basis points.

The rise in the 10yr Gilt puts it at its highest level since 2011, with Liz Truss’ plans to tackle the cost of living crisis driving expectations of higher Government indebtedness.

In the US treasuries took a hit as the ISM and the S&P Purchasing managers index came out. The ISM Services index came in at 56.9 higher than the 55.3 expected.

This was interpreted as likely to support the Fed’s hawkish stance with larger hikes warranted. The 30yr treasury rose to c.3.5% the highest it has been since 2014.

There was contrast provided by the S&P Global Services and Composite PMIs which came in weaker than expected, at 43.7 and 44.6 respectively.

Equities

Equities enjoyed a bounce in Europe, whilst the ECO data in the US saw any positive momentum fade as concerns over higher rates and a srtonger USD bit.

Europe is opening down -60 to -80bps and the FTSE is down c.1% at time of writing.

Today’s Events

Companies:

No Reporting Due

Eco Calendar:

Of Note

US Loans – safe haven no more?

There were a couple of articles on leverage loans that caught our eye – the first from the Wall street Journal “Junk-Loan Defaults Worry Wall Street Investors” – pointing to increasing credit rating downgrades, higher interest payments the expected decline in corporate earnings and defaults hitting $6bn in the US in August the highest since October 2020.

“Borrowers are particularly vulnerable to the double whammy of weaker earnings and rising interest rates,” Morgan Stanley strategist Srikanth Sankaran said. That will trigger a wave of credit-rating downgrades and push average loan prices—currently 95 cents on the dollar—below 85 cents, a level breached only during the 2008 financial crisis and the depth of the Covid-19 pandemic, he said.

Wall Street Journal

Elsewhere Bloomberg published a contrasting piece : “Leveraged Loans Remain Comfortable With Tough Macro Outlook” – here the focus is on the relative value of loans vs. high yield. Loans tend to hold up much better compared to their High Yield peers – helped by their floating rate structure and given they trade less frequently Mark to Market is often less volatile.

They too point to the negative impact of increasing rates increasing interest rates.

At some point Loans are likely to play catch up with high yield bonds interms of perfromance.
 

Liz’s plan

This article from the FT “Liz Truss on collision course with Bank of England over boosting economy” looks at the challenges of marrying Monetary and Fiscal policy and what it means for the economy and rates.

TL;DR – moderation of inflation, higher chance of avoiding recession, increased borrowing, higher frontloading of rates hikes and prolongation of higher interest rates in the UK.

The final item of note are the number of headlines highlighting USD strength. This article from the World Bank explains how a strong USD impacts EM economies

Performance

High Yield

Investment Grade

Rates

Equities