Credit Market Daily #13

08-Sep-22

Good Morning! The ECB will likely dominate today, with the BOE and Fed next week and the week after respectively.

Credit

High Yield

It proved to be a mixed day in high yield with the Bloomberg Barclays’ High Yield Indices posting a small gain on the day in Europe and the US up +10bps and +36bps respectively.

The GBP Index underperformed down -94bps on the day.

In single names – retail names in the UK continued to benefit from the expectation of support with Iceland and Asda both higher, again, according to the Iboxx Markit Indices. Marstons & Mitchells and Butlers (Pub operator) underperformed on the day.

Looking to the CDS indices ended the day c.24bps tighter 558 at in line with equity markets which rallied into the close.

Xover is some 9bps tighter on the open with equities.

The basis – difference – in the spread between the Xover (558) index and the Bloomberg Barclays HY Cash Index tends to blow out in times of stress.

The current level sits at c.82 basis points this is 50bps tighter than (475) the 136bps differential seen at the end of the month.

For context, the average since 2012 is -20bps. This suggests that market participants are well hedged.

Leaders and Laggers

Investment Grade

European Investment Grade was flat on the day with the Bloomberg Barclays European Corp Aggregate up +0.01%, with single As and BBBs outperforming higher rated Double and Triple-A bonds.

The 5-10yr part of the index is where the most performance was up c.8 -10 basis points.

New Issuance did not abate – in continuing contrast to High Yield markets. We count 8 benchmark deals pricing yesterday in Euros, most of them Financials for a c.€5bn of issuance.

BBB rated Ferrovial issued a €1.1bn 4 Year bond, the largest of the day. Initial price talk was Benchmark +100, and it priced 13 bps tighter, for an all-in yield of 3.847%

Rates

Today will be dominated by the ECB meeting with expectations of a 75 basis point hike to be announced at 13.15 today.

Any deviation from market expectations would likely cause a stir (however unlikely).

Also in focus will be the ECB’s anti-fragmentation tool as spreads between Italian & German government bonds has continued to climb (markets often like to test Central Banks) ahead of Italy’s elections at the end of the month.

UK markets expect to hear more today on the new government’s fiscal policy, another catalyst for today.

In rates – the front end of the Gilt Curve declined as Huw Pill of the BoE commented that the proposed Fiscal support in the UK would lower inflation.

2 Year rates declined some 20 basis points on the day, with the Gilt curve bull steepening.

10 yr Gilts were -6.6bps tighter at 3.03%, 10yr Bund was flat around 1.58% and the US 10-year was -3bps tighter at 3.23%.

The decline in UST yields was helped by the slump in crude prices – Brent was down 5.2% to $88/barrel as slowing global growth has tempered demand expectations. US Rates moved lower with the decline in implied inflation

Equities

Equities enjoyed a bounce back in Europe into the close having ended the day lower led by the US. The DAX ended the day +0.35% higher, the CAC 40 +0.02% and the FTSE underperformed down -86bps on the day.

The Broader Euro Stoxx 600 index ended the day down -0.57% whilst the FTSE All Share was down -0.72%

At the time of writing European, Futures are green with the DAX up +48bps and the CAC 40 +70bps. FTSE futures are up +24bps.

In the US the S&P500, Dow Jones and Nasdaq rose +1.8%, +1.4% and +2.1% respectively with the Wall Street Journal attributing the turnaround to investors seeing the US’s economic resilience as being positive despite the upward pressure in rates.

We aren’t wholly convinced that the FED gets its soft landing.

Today’s Events

Reporting

Birkenstock

Guala Closures

Pizza Express

Eco Data

What Has Caught Our Eye

Breakeven Spreads

If you follow European High yield Online you will know we run an Investor Survey with Bloomberg Intelligence.

Their Chief European Credit Strategist Mahesh Bhimalingham put out a note yesterday on break-even spreads.

Breakeven spreads are equal to bond yield or spread divided by duration – essentially they are a measure of how much excess carry or cushion you have that will offset any increase in yields or widening in spreads.

The Bloomberg Link to his piece is here.

In summary, breakeven spreads for Investment Grade bonds are at a “QE-Era record, well beyond the pre-pandemic peak” at 71 basis points of carry per unit of duration.

In High Yield, breakevens are at 225 bps per unit of duration, just below the pandemic peak of 225bps. On a relative basis though he finds that IG looks more attractive:

Since then, with bunds selling off and high grade yields rising and spreads widening on inflation and the war in Ukraine, the ratio between the two asset classes has dropped to 3x, which is the close to decade lows. High grade’s cushion has thus clearly improved much more than high yield’s in this selloff.

Mahesh Bhimalingam, Bloomberg Intelligence

Strong USD

This chart from the DailyShot caught my eye – it shows the investors in the US have been shunning companies with international exposure, whilst domestic-led companies with no FX exposure have been performing.

It would be interesting to see how much reverse is true in Europe and the UK as USD revenues and earnings should be a boon.

A small silver lining when it comes to the “USD -Wrecking Ball” ?

Performance

High Yield

Investment Grade

Rates

Equities