Credit Market Daily #22


Good Morning!

The Bank of England spoke and rose rates 50bps as expected.

Three members voted for a 75bp hike and one member 25bps with 5 members voting for 50bps.

Bullet point summary in the “What Caught our Eye” section below.

Expect some pressure on UK Investment grade corporate spreads to come under pressure with the BoE’s announcement that it will start selling its holdings built up in its APF scheme.

What was once a positive technical for £ investment-grade primary issuance will reverse.

Again – Central Banks did as they said they would and again we drifted lower in equities, wider in credit spreads and rates continued to bear flatten.

UK consumer confidence for September just came in at -49, the lowest on record. This should hopefully rebound given today’s mini-budget.

The sentiment is very negative across businesses, consumers and markets -” it’s always darkest before the dawn” – this night feels very long.

As Governments roll out their economic packages we should see a rebound in sentiment – but whether it is the Fed’s “soft landing”, avoiding a recession in the UK, or reducing the depth of one in Europe – the blow may be softened but it is still going to hurt some.

Today’s UK mini-budget will be closely watched by corporates – especially those in consumer-facing industries (-49!!).

So I think there is potential for a rally in retail/ pubs/ entertainment in UK High Yield given those sectors have sold off into “Fiscal Friday”.

How sustained any rebound is will depend on the detail.

This morning we have a raft of PMIs – UK, US and Europe. I really hope that we can move on from the”BAd NeWS iS GoOd NeWS” mentality where markets are hoping for signs of a slowing in rate rises.

The reality is we should expect this to continue into November and December – any dovishness will likely come in the form of pragmatism on the back of softening data – but the path for higher rates is set.

The flip side of this doom and gloom is that risk-reward is improving, for example, GBP HY spreads are now trading with a Z score greater than 2. the same value was around 1.4 at the End of August.

European Investment Grade breakevens (Yield or Spread divided by duration) have “hit a QE era record, well beyond the pre-pandemic peak” to 74bps according to Bloomberg Intelligence as we flagged in CMD#13.

“Pick Your Spots”.


High Yield

European High Yield outperformed Equities yesterday returning -26bps on the day. the Index spread was flat at c.551bps.

The more rate-sensitive BB segment underperformed slightly.

GBP high Yield Returned -24bps on the day, whilst US High Yield was down -78bps on the day. US HY spreads were 6bps wider on the day underperforming Europe.

This could reflect the higher concentration of oil-related names in the US index: Oil sold off on global growth concerns.

The big “if” is in GBP HY where a supportive mini budget may see consumer-facing names rally.

In single names – Ani/Ikos bonds rose 6 points after Singapore’s GIC bought a stake in the company for €2.3bn.

This is the second “event” in as many days that has seen bond prices pop.

Now, I am not sure how obvious these events were but it does highlight that idiosyncratic or name-specific risk is one way to offset the risks of negative beta.

Another broader, example would be state ownership in the Utils space being a backstop to spreads.

Looking at the 12-month Z-scores below shows that Euro and USD high yield has some way to go to catch up with GBP high Yield in terms of “cheapness”.

Relative value is only starting to get interesting at an asset class level.

Before you think I am getting bullish – this is all in the context of a market where spreads are likely to move wider – the “negative beta”.

Xover ended the day 18bps wider at 619 and looks to have opened flat.

Leaders and Laggers

Investment Grade

European Investment grade was relatively quiet yesterday in primary with the continued focus on high-rated, agencies and gov related issuers.

In terms of performance, The European Corporate Agg underperformed High Yield down -57bps on the day.

In terms of credit spreads, there was no change at c.201bps – the move lower being solely driven by rates – as expected – low spread, long duration segments all bore the brunt of higher rates.

Itraxx Main widened 3 basis points on the day out performing Xover.


Rates in the UK and US bear flattened, having opened tighter.

The 10-Year Treasury, Gilt and Bund yield 368bps, 345bps and 190bps respectively.

German and French PMIs have just come out. The composite PMIs were 45.9 vs 46.1 expected and 51.2 vs. 49.9 expected respectively and are moving lower.

In the UK I would expect further movement in rates following the mini-budget. It seems the consensus is that the Governments moves are ill-advised given the UK’s economic outlook.


Equities on the other hand are not liking the PMIs with the DAX down -65bps on the open following on from a -1.8% decline yesterday.

Overall markets in Europe were lower, with the FTSE outperforming down 1% with the rest of Europe down between -1.07% and -1.85%.

In the US the Dow Jones, S&P 500 and Nasdaq returned -0.35%, -0.84% and -1.37% respectively. US futures look to be down across the board c-40bps.

Today’s Events

Eco Data


Source: Company

What Has Caught Our Eye

BoE Statement

Main Points to Consider:

  • Hiked 50bps – split was 5:3:1 for 50:75:25 basis points respectively
  • Starting Quantitative Tightening £80bn reductions in Gilt holdings to £758bn
  • Will sell down Corporate Bond holdings in APF via auction
  • November meeting will see the committee respond to announced Fiscal plans
  • Consumer spending is expected to have peaked in Q3, and signs of slowing labour demand but the market remains tight
  • Energy Bills will increase, but the peak in CPI will be lower at 10.5% peaking in October before declining
  • Signs of continuing strength in domestically generated inflation
  • UK GDP growth slowing in Q3 ’22

“The scale, pace and timing of any further changes in Bank Rate would reflect the Committee’s assessment of the economic outlook and inflationary pressures. Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee would respond forcefully, as necessary”

BoE Minutes
Lower CPI Expectations

Interest 2

Mahesh Bhimalingam Chief European Credit strategist published an interesting article yesterday on the potential for fallen angels in European credit.

The main takeaways are that Fallen Angels (Issuers moving from Investmentgrade to High Yield) have been extremely limited, 1 in Q3, but there has not been a corresponding increase in the number of rising stars (Issuers moving from High Yield to Investment grade) this is on the back of weakening fundamentals and rising borrowing costs.

Bloomberg Intelligence sees 106 bonds or £59bn of par value vs. 3423 bonds in the Index and £2,566bn of Index par value at risk of a downgrade.

Interesting the Fallen Angel Premium for holding such debt is at record lows – as measured by the ratio of a custom BBB- index to the Investment grade index.

This BBB- index ratio hit 1.8x in October 2020, but currently stands at 1.47x not far from 1.4x QE-Era lows.

“Pick Your Spots”

Falling Angels at Lows, Rising Stars also

Source: Bloomberg Intelligence

€59bn of European Investmentgrade at risk of downgrade

Source: Bloomberg Intelligence

But – Potential Fallen Angels are not cheap

Source: Bloomberg Intelligence


High Yield

Investment Grade




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