Credit Market Daily #14 %author %

09-Sep-2022

Good Morning! Friday is here – overall opening positive day for credit and equities.

We would expect UK markets to digest the UK Government’s Energy rescue plan today.

Yesterday we had the ECB hike 75bps as expected, with the potential for more large hikes on the table.

No talk of the anti-fragmentation tool seems a mistake.

In the US Powell spoke at the Cato Institute and reinforced market expectations of a 75bp hike.

Credit

High Yield

In High Yield, we look dangerously close to ending the week with a positive return.

The Bloomberg Barclays Euro HY index was up +26bps yesterday, with single Bs and CCCs leading the charge up c.+45bps each.

Week to date the index return is up +14bps with the higher beta/ lower-rated segments up c.+40bps and BBs flat at +2bps.

If the rating/ beta outperformance continues then there may be reasons to believe in a short-term bounce. Over the medium-term fundamentals will likely weigh on the sentiment boost from positive and systemic fiscal action.

The questions are are governments acting fast enough? On the Monetary side will Central Banks over-tighten and pop the “Everything Bubble”?

US High Yield was up +49bps, with Bs outperforming again, the market looks to end the week in positive territory with the BB USD HY index up +62bps on the week.

UK high yield was up +34bps and is in sniffing distance of a positive week, currently -10bps Week to date.

In CDS Xover ended slightly tighter around 550 and is currently c. -20bps on the open

Leaders and Laggers

In terms of single names, the Iboxx Markit GBP HY Index saw a continuation of beaten-up consumer names – Iceland, Matalan, and Asda all up over a point – all three names up 1.5-3 points on the week on the back of the Energy Package.

As with all things (especially Government Support ) the devil will be in the detail.

GKN bonds were slightly lower on the day with headlines that it is spinning off its auto business, which it plans to list.

With one bond redeeming next week and only the 2032s left outstanding, investors likely have questions about the use of listing proceeds and what the business looks like ex. Autos.

In European High Yield Teva’s bonds look to be c.2pts higher on the back of positive news regarding one of its drugs.

Perhaps the longest named issuer in the high yield market – Samhällsbyggnadsbolaget – a Swedish real estate company – saw its bonds up 3pts on the news it is divesting 9bn Kroner or $841m of assets to shore up its credit rating.

Investment Grade

In Investment Grade – cash indices were down on the day with the Barclays Bloomberg Corporate indices for Europe, GBP and US down -52bps, -100bps, and -24bps respectively.

This performance looks to be rate led with the index spreads for Europe, UK and US having moved 0bps, -1bp, and -2bps on the day.

CDS indices were tighter on the day with Main outperforming Xover 3bps tighter on the day.

Rates

10Yr Gilts are yielding 312bps, 10Yr Bund 175bps and the 10yr UST 329bps.

In the UK Yields rose higher across the board on the day post the Government announced support for businesses and households.

Powell’s hawkish speech yesterday saw US yields rise – with the front end bearing the brunt of the move as markets priced in near-term hikes.

Rates in Europe saw their curves bear flatten with the front end underperforming the belly and tail post the ECB removing the deposit cap on government deposits. This morning Bunds look to be moving wider across the curve.

More interesting was the ECB’s complete lack of communication on their anti-fragmentation tool – the BTP – Bund spread is 6bps higher this morning at 230bps.

Expect markets to push the ECB into communicating and this spread to widen as markets seek reassurance.

Equities

Equities are opening up in Europe – the FTSE is up 99bps, liking the government support, the Dax up 71bps and futures in the US are +55bps, +64bps, +95bps for the S&P, Down Jones and Nasdaq respectively.

This follows a moderate up day yesterday, where equities took Central Bank Hawkishness in their stride.

Today’s Events

Reporting

Golden Goose

Progest

Rallye

Viridian

Eco

What Has Caught Our Eye

UK’s £150bn Energy Package – Lower For Longer No More

The package is clearly positive for consumers and will definitely help consumer-facing businesses, however, there will still be a 25% increase in costs from current levels that will need to be digested.

Companies are covered for 6 months and I would expect this to end up being a rolling 6 months, in the meantime, it poses some uncertainty for investors and business owners alike.

The Government has announced around £150bn of measures to cap the price of household energy bills to £2500 for 2 years and businesses for 6 Months. (That is still a 25% increase from current levels)

As discussed yesterday the main impacts of the plan are a front-loading of rates and a reduction in peak inflation.

Bloomberg reports that Nomura and Natwest have increased their year-end BoE rate target to 3.75% from 3.5% and to 3.5% from 3% respectively.

Goldman Sachs is now expecting a 50bp increase at each of the next meetings now with the Boe rate expected to reach 3.25%.

Expectations are that the UK should miss a recession – Bloomberg expects the UK economy to now grow at 0.2% per quarter.

However, inflation is likely to be more persistent, especially if it frees up household budgets to spend on other goods and services.

This in turn means a hawkish BoE as Borrowing swells.

“Lower for Longer” is Now “Higher For Longer”.