Credit Market Daily #19 %author %

16-Sep-2022

Good Morning!

Well, we made it, it’s Friday.

Markets continued to drift wider yesterday – we look at the week-to-date performance below.

The story it tells is one of a transatlantic divide with US risk assets underperforming their UK and European peers across the board.

With the Fed and BOE next week we will likely enter a holding pattern with a bias for spreads to drift wider.

The risk of “surprise” is to the upside – a sniff of dovish-ness from either central bank would cause a snap back in risk assets. This has to be viewed as a low probability event we think.

Eco-data yesterday in the US was relatively positive.

Initial jobless claims were lower than expected, the Empire Manufacturing index at -1.5 vs -12.9 expected and -31.3 prior, retail sales beating expectations at 0.3% vs. -0.1% MoM expected. Capacity Utilisation solid at 80%. The only stinker in the crop was the Philly Fed business outlook at -9.9 vs 2.3 expected.

The problem is that all of these data points point to resilience and make the “Fed Pivot” narrative harder to swallow. What could become the next narrative is that of the Fed achieving its “soft landing” and this could lift risk assets.

We will have to see what next week’s meeting brings.

UK retail sales have just come in worse than expected for August -5.4% YoY vs. -3.7% expected. This follows on from weak numbers from Ocado and John Lewis this week – we think that the recent bounce in UK consumer names in HY has a sell-by date.

A couple of housekeeping points – we added a note on Saga PLC to the site and would love feedback. It is accessible to club members on the site. As a reminder – its free.

We also added a new category to the blog page “Meta-threads” these are meant to be education/information repositories that will be built up over time and act as a resource for our site users.

The first is on Currency Strength and focuses on the USD.

Finally – we are having a social at the Rose pub near London Bridge at 18.00 on the 5th of October – details here everyone is welcome and the idea is to meet up with site members/ fixed income nerds.

Credit

High Yield

Looking at the week-to-date returns Europe has been the clear winner, GBP high yield second and the US the clear underperformer. Performance was -16bps, +79bps and -150bps week to date respectively.

In CDS Xover ends the week 14 wider whilst the US CDX HY ends the week a whopping 54bps wider.

ETFs really suffered this week with the Euro HY ETF down 3.32% on the week actually underperforming its US equivalent which was down -2.45%.

The EUR ETFs disconnect vs. the cash index suggests poor technicals/flows.

In terms of single names, Constellation Auto reported a weak set of results and was punished with a 5-6 point drop in its bonds. We will post a summary of its results in the site’s Feed later today.

On the day Bloomberg Barclay’s EUR, GBP and USD High Yield indices returned -4bps, -79bps and -150bps respectively.

Europe’s outperformance makes us wonder if it is due a negative catch-up with peers.

Leaders and Laggers

Investment Grade

Investment Grade saw further issuance with roughly €4bn of issuance – the majority of this coming in the form of a €3.5bn 4 tranche benchmark deal from A-rated Medtronic.

In terms of week-to-date performance, the refrain is the same as seen in High Yield.

The Bloomberg Pan European Corporate Agg was -27bps on the week.

In terms of duration the belly of the curve has underperformed returning c-40bps, whilst the long end shone this week up +47bps.

Sector-wise Financials are the winners up +35bps on the week, with utils and industrials down -22bps and -15bps respectively.

US investment-grade is down -74bps on the week with similar performance across financials, utilities and industrials. similarly, there was no differential in performance across duration.

In CDS the EUR Itraxx main was c+4bps wider on the week and the US CDX IG double that at +8bps wider.

Rates

Overall it was a softer day in rates with Europe underperforming the UK and US respectively. There looks to have been a significant flattening of curves with 2 yields rising +12bps and +6.26bps in Schatz and Gilts.

10-year Treasuries, Gilts and Bunds Yield 345bps, 316bps and 177bps respectively.

Equities

It was an overall weak day in equities yesterday with the FTSE ending the day flat whilst its European Peers were down -50 to -100bps.

In the US the Dow, S&P 500 and Nasdaq were down -56bps, -113bps and -143bps respectively.

At the time of writing futures in the Us look to be down c-75bps, with the Nasdaq continuing to underperform down c.-100bps. European Futures are down a similar amount.

It certainly looks like the soft tone will continue.

Today’s Events

Eco Data

We have had UK retail sales come in softer than expected, other important data points for the day include Eurozone CPI and the University of Michigan Consumer Confidence numbers.

Reporting

Stonegate

What Has Caught Our Eye

Active Management – Heads I win, Tails you lose?

This article from the FT “The active comeback!* iT’s a StOcKpiCkEr’S MaRkEt” highlights the challenge active investment managers face when looking to beat the benchmark.

However, this year active management in US equities is yielding slightly better results vs. history. The image below shows how tough it is for active managers to shine.

“the longer-term trend remains grimmer than grim. As you can see from the table above, only 8.2 per cent of US equity funds have managed to outperform their indices over the past decade.”
Robert Wigglesworth, FT.

Curves continue to flatten

Syz Portfolio Manager Gael Fichan flagged a first in the German Rates market.

German 10y/30y yield curve inverts for the 1st time ever!
The flattening should continue, especially in the 2y/10y segment of the GER yield curve, as the #ECB continues to raise its #deposit rate. Spread between German 10y & 2y yields is at 22bp while in the US it is at -40bp… pic.twitter.com/ie0uStfDHA
— Gael Fichan (@GaelFichan) September 15, 2022

Collateral Damage – Scarcity to drive Hikes

Bloomberg reported that there is a shortage of high-quality assets in the Euro Area’s repo market and this is keeping a lid on money market rates.

This is not what the ECB wants as the cost of borrowing funds against Geman Govt debt is only 57bps, vs. the 75bp increase in the ECB’s main rate.

The implication is that the ECB may have to hike harder or intervene directly to ensure their increase in the cost of funding is felt in markets.

Credit Market Daily #19