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Credit Market Daily #23

Posted on by thegr8destructo Posted in Credit Market Daily, High Yield

26-Sep-2022

Good Morning!

Kwasi Kawartang’s “Fiscal Event” was meant to shock and awe. Unfortunately, it looks only to have achieved the former.

Someone clearly told him “Go Big, or Go Home” and everyone is now wishing he had gone home. GBP/USD touched an all-time low of 1.03 in Asian trading.

Markets are clearly judging the announced £45bn of tax cuts as imprudent with GBP/USD at 1.076 at the time of writing down from 1.12 seen pre the Government’s announcement.

This has not been helped by the Chancellor’s comments that there are more Tax cuts to come.

This is the largest weakening in the pound since ’08/’09 which saw GBP down 28%, YTD GBP is down c.21.5%.

Brexit saw the pound down c.16.2% for reference.

Gilt Yields experienced their largest one-day move since 1998:

Itraxx Crossover is approaching Pandemic wides 637 now vs. 708 then.

What does this mean?

It looks like markets are will likely force the BoE to act to offset some of the fiscal largesse – the possibility of an emergency hike/ or reference to an increased hike in November would go some way to help restore calm.

Markets have learned to force central bank intervention – think “taper tantrum”.

This is no different – new lows in GBP/USD, higher yields and wider credit spreads are all on the cards, with some form of snapback once the BoE has acted/ new leaks.

The size of that snapback will reflect any change in the Fiscal environment.

Without a Mea Culpa from the UK chancellor and/or a statement demonstrating some fiscal prudence, it feels like the UK’s sovereign risk has taken a step change for the worse.

Looking at UK CDS relative to German CDS – UK CDS has clearly underperformed year to date – but the ratio of its spread to German CDS is 0.48x.

The Pandemic low was 0.4x. UK credit risk has some way to go in terms of relative weakening.

Importing goods and inflation, borrowing costs and corporate confidence have all worsened in the blink of an eye. The speed of the move is unsettling.

Markets have voted.

However – it is important not to forget that the Energy package and “fiscal event” will have a positive impact on the UK’s ability to avoid a recession.

The efficacy of the latter is receiving a lot of scrutiny/ scepticism , but the former means catastrophe has been avoided.

Credit

High Yield

We are opening weaker in European High Yield.

The Xover index is another 15bps wider at 652. This is in contrast to Equities in Europe which are opening small up.

Italy’s elections over the weekend saw the far right coalition come to power and we would expect some softness in Italian names as markets digest the news (BTP – Bund spread covered in rates section below).

In terms of index performance European High yield Credit widened around 8bps on the day outperforming CDS, returning -48bps on the day.

Single Bs look to have bore the brunt of the move as they returned -60bps on the day.

US high yield widened +24bps on the day to z+524, returning -95bps on the day and underperforming Europe.

All rating buckets performed the same.

In primary, the Inetum deal that was publicised to be coming in the Bond market on the back of a lack of appetite in the Loan market, actually saw its bond deal pulled with the loan upsized – which is positive for the company and shows there is appetite in the loan market.

Leaders and Laggers

In terms of movers – in GBP there looks to have been no positive price action on Friday with the average bond move down c-0.8pts, with the median move down c-0.74pts.

Overall long duration suffered the most – as you would expect – with consumer facing continuing to be under pressure.

The exception is Matalan which is a distressed name and announced it had extended its first lien bonds to a 2027 maturity from 2023. Bonds are up c. 1.75-2pts

In Euro HY Intrum’s bonds were down c. 3 points on a profit warning. Again this shows how single name risk is increasing in importance when it comes to high yield.

The performance gap between companies meeting and beating expectations vs, missing them is only going to increase and with it opportunities.

Investment Grade

In investment grade Credit it was more of the same with longer duration, low coupon names sold off on the back of higher rates.

Despite this European IG credit still outperformed Equities on the day with the Pan Euro Corporate Agg returning -86bps on the day.

In terms of spread the index was +1bp on the day outperforming high yield in terms of cash credit.

There was no primary corporate issuance in Europe on Friday other than govt related and agency issues.

This still looks to be the case this morning and is something to watch as the primary market had been a bright spot in the market demonstrating investor appetite for corporate bonds.

Rates

UK Gilts were the centre of attention on Friday with 25-50bp increases across the curve in the largest moves since 1998.

I think that markets may well push for intervention from the BoE – in the meantime markets are increasing their expectations for 100 to a 125bp hike in November on the back of the Fiscal Event.

The 10 year Treasury, Gilt and Bund Yield 377bps, 415bps, 209bps.

Post the Italian Rights victory in elections the BTP – Bund spread is continuing to widen to 235bps.

It still remains below recent wides, implying some increased uncertainty – but no panic.

One key issue I am concerned about is, is how the change in leadership will impact Europe’s solidarity with Ukraine as we enter winter.

Equities

Equities were down across the board on Friday – and opened positive this morning – with the FTSE relatively flat.

Month to date the Dax is down -4.29% vs. the European High Yield Index down 2.05% and the European Invetsment grade Index is down -3.38% for reference

Today’s Events

Economics

Today we had better than expected House price moves +0.7% MoM and the German Ifo Business index came worse than expected at 75.2 vs. 79.0 expected for September.

We have the OECD publishing its interim economic outlook this mroning and Dallas and Chicago Manufacturing activity indices in the Us.

Reporting

Matalan – Announced maturity extension and trading update

What Has Caught Our Eye

Strong USD -> lower earnings estimates

This is from Callum Thomas’ weekly chart storm – I strongly recommend your subscribe.

Keeping earnings revisions in the fore.

Global Recession Outlook

Citi’s expectations for when and how long recessions may last by region. The UK is slightly concerning given this came out after the energy cap was announced.

Capex Leads Valuation

Performance

High Yield

Investment Grade

Rates

Equities

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