Credit Market Daily #25

FTSE – Intraday

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Credit

High Yield

European High Yield outperformed yesterday returning -13bps on the day its spread actually tightening -4bps on the day to 575bps.

GBP High Yield returned -33bps on the day it also seeing its credit spread tighten 2bps to 613bps. US High Yield was weakest returning -43bps on the day with CCCs underperforming.

Xover ended the day 15bps wider and is opening 16 basis points wider at 686bps.

In terms of single names duration was under pressure in GBP HY. The Primary market remains open – with Verisure and now also House of HR (which has been well flagged) in the market. Let’s see if they manage to get the deals away.

Leaders and Laggers

Investment Grade

Investment grade continued to underperform High Yield driven by duration.

European and USD Investment Grade returned -74bps and -115bps respectively on the day.

In terms spread performance Euro IG widened +2bps to +207bps and US IG +6bps to 155bps.

In terms of primary the Smith and Nephew deal mentioned yesterday is in the market. The Baa2/BBB+ rated name is looking to issue a €500m -Year Senior unsecured deal.

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Rates

Rates continued to widen yesterday around the globe.

Gilts were the underperformer with the long end out 45-50bps. The 30yr Gilt rose above 5%, a level not seen since 2002.

Markets are now pricing a 6% Bank of England rate by May next year – for reference this was 4.67% on the day before the mini budget

10-Year Treasuries, Gilts and Bunds yield 399bps, 447bps and 230bps. Of Note, 10 Year USTs reached 4% yield yesterday – a level not seen since 2008.

UK Base Rate Expectations

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Equities

Equities as mentioned earlier started yesterday in the green but this rapidly declined with new lows being reached in the US.

At time of writing equities are down -1.25% to -1.75% in Europe and the FTSE is down -1.55%.

Futures in the US are down -0.69% to -1.29%

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Today’s Events

Eco Data:

German consumer confidence – continues to crater September’s numbers reach an all time low (again, again). UK retail inflation hit 5.7% up from 5.1% with retailers pointing to the cost of goods, supply chains, staffing and energy all having a negative impact.

Later today we have US inventories.

Reporting Today

Morrisons

Orpea

Phoenix Pharmahandel

Takko

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What Has Caught Our Eye

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GBP – IG

Following on from yesterday Bloomberg posted an article “UK Blue-Chip Bonds’ Distressed Club of One Now Has 340 Members”

They highlight that the rapid movement in UK rates has caused 340 bonds within the index to trade at “distressed” levels with prices below 80.

We would argue that anything that is in an investment-grade index is not distressed. Fraud tends to be the only thing that can bring an IG company low quickly.

A better way of thinking about it is the decline in cash prices is a function of the current cost of borrowing and the discount existing issuers are having to offer.

“The rout in gilt yields has filtered into credit spreads too and that combination has pushed many sterling high grade bonds into distressed pricing despite the credits themselves not being distressed and rated investment grade,” said Mahesh Bhimalingam, chief European credit strategist at Bloomberg Intelligence. “The longer duration of sterling credit vs. euro credit really doesn’t help in this environment.”

Bloomberg, 28-Sep-2022

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A Couple of Warnings

Boohoo has warned on profit on the back of a weak economy and higher returns. Sales are guided to be down 10% YoY for the second half of the year vs. +2% expected growth.

Saga reported yesterday and lowered its full year guidance on the back of increased inflation increasing the cost of insurance claims.

The company commented positively that it was able to pass on cost inflation to customers in its cruises business.

I continue to watch for weaker earnings and management’s comments around them given current expectations are high and will either peak or start to show signs of deterioration, which should weigh on credit spreads.

This page from EY has a great summary of profit warnings to Q2 and should be a valuable resource going into Q3.

Looking at the main reasons for profit warnings its hard to argue that Q3 is not going to see more of the same with cost inflation and sales pressure dominating, also of note 2022 year to date has been a relatively quiet one for profit warnings.

Profit Warnings by Sector

2022 has been a relatively benign Year so far for warnings from FTSE companies:

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Dollar Drain

Liquidity is being dawn from the global system and financial conditions tightening – these 2 tweets show the change in M2 as well as the correlation of yields with tightening financial conditions.

Something to bear in mind as the reduction in liquidity has only just begun and we are already seeing a significant impact as markets price in fewer USDs.

Performance

High Yield

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Investment Grade

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Rates

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Equities

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