Credit Market Daily #16 %author %

13-Sep-2022

Good Morning!

Another risk-on day across Credit, Rates and Equity.

“The Market Expects”.

It certainly does – welcome to CPI day – German (7.9% YoY – inline), Spanish and US (13.30 GMT) numbers today. UK, France and Italy Wed, Thurs, Fri respectively.

The rally risk assets continued with expectations that today’s US CPI will show a slowing in price growth and therefore reduce the Fed’s aggressiveness in raising rates. Let’s see what the day brings.

Personally, I am looking forward to the German Consumer confidence numbers and rooting for some kind of bounce – economic expectations hit all-time lows last month at -55.

As Europe’s economic engine it is certainly worth keeping an eye on.

Credit markets are definitely alive with a large amount of issuance in IG yesterday and increasing noise that the European High Yield bond market will open. There are a couple of € Loans in the market currently.

The $ Citrix high yield deal mentioned a few days back is due to be marketed today according to Bloomberg – if it is well received (necessary discounts aside) it will likely open the door for primary high yield markets in Europe.

For those of you on the buy/sell side, the Bloomberg Intelligence Q4 HY investor survey is out.

Click here to participate.

Credit

High Yield

The Bloomberg Pan Euro High Yield Index started the month with an OAS spread of 573. Month to date it has tightened 36bps, now yielding c. 7.03%.

For context the YTD OAS spread tights, wides and average were 301, 668 and 471bps respectively.

In comparison Xover started the month with a spread of 586bps and the month to date has tightened a whopping 78bos basis points – over double the tightening seen in cash.

This is in part likely due to Xover being used as a hedging instrument (shorts being covered) and the up-and-coming roll of the index.

Nevertheless, it has put in quite the shift in the last few days.

In terms of performance, The Bloomberg European Pan European High Yield index returned a respectable 43bps on the day with higher beta single Bs continuing to outperform, up 51bps.

GBP high yield was up 47bps and US High Yield up 28bps.

See the clip of Morgan Stanley’s Head of Credit strategy below.

He describes the move in spreads as a bit of a “head-scratcher” given the fundamental outlook.

We certainly agree, but we also think that markets lack conviction – think the recent NFP – and so short-term, risk markets are led by the nose by the latest narrative.

If and when central banks “pivot” it will be because the economy will be signalling recession/ slowdown.

Leaders and Laggers

Investment Grade

Yesterday was a busy day for Investment Grade New Issuance with c.19 new issues in the market.

Telia and KPN (both Telcos) caught our eye both coming with corporate hybrids – which tend to be higher beta instruments given their structure and subordination.

Both look to have been “Green” bonds.

Telia’s bonds had initial price talk of 5.5%, were guided to 5.125% area and priced at 4.875%. Books were >5x covered.

KPN’s bond has yet to price, but, judging by the Telia deal investors have room for defensive names and risk appetite is real.

As to performance – The Bloomberg Pan European Corporate Agg index outperformed European High Yield up 47bps on the day, again duration being a key driver – the 10+ duration bucket returning 128bps on the day.

Ratings wise higher duration AAAs returned 64bps whilst the rest of the rating categories returned 41-48bps.

GBP investment grade returned 85bps on the day. In the US IG was actually flat to small down, with the long maturity index underperforming the short maturity index.

The Main CDS index was c. 3bps tighter on the day underperforming Xover.

Rates

A positive day for rates as markets look ahead to the CPIs and expectations of less hawkish central banks.

10-year USTs, Bunds and Gilts yield 334, 165 and 308 bps respectively.

Equities

Equities were positive across the board yesterday.

The FTSE 100, DAX and Euro Stoxx 600 returned 166bps, 240bps and 176bps respectively. in the US the Dow Jones, S&P 500 and NASDAQ returned 71bps, 106bps and 127bps respectively.

At the time of writing futures are all flat to small down in Europe and c+30bps in the US as they wait for direction.

Today’s Events

Did I mention CPI?

Reporting

Kiloutou

Ocado

Petra Diamonds

WFS

What Has Caught Our Eye

Potential New issues

Bloomberg published an article yesterday where they identified Speciality paper producer Fedrigoni on the back of BC partners taking a stake, House of HR has a €1.3bn syndicated deal (bonds & loans) expected October, TDC (telecoms) has hired a group of banks as part of a €1.4bn refinancing

Limacorporate SPA (Medical Devices) and Italmatch (Chemicals) both have bonds that will be callable at par within the next week or so making refinancing interesting

Sentiment/ Confidence

We are going to try and post something on Sentiment/ Confidence each day of the rest of the week.

Today’s offering comes from this article from Real Investment Advice.

These 2 charts show Small Business confidence and CEO Confidence in the US – both of which have touched recent lows.

The implication is that negative sentiment will weigh on investment and hiring. This in turn weighs on the economy which in turn would lead to increased unemployment in the US.

Credit Spreads – “A Head Scratcher”

This video of Morgan Stanley’s Chief Credit strategist on the recent moves in credit spreads is worth a watch: