Credit Market Daily #28

03-Oct-22

Good Morning!

Friday’s feel good feeling faded after the close in Europe and this morning we are opening lower in equities and wider in credit.

It was the UK government’s turn to blink – the Chancellor announcing that he was scrapping the tax cut for high earners.

This is roughly equivalent to £2bn in terms of the total 45bn – GBP/USD is higher this morning at around 1.12 and Gilts are rallying in the front end as markets price in a lower bank rate.

Given the overall size the cancelled tax reduction represents it is hard to see this as having a huge impact on the Gilt and FX market over the medium term and I would expect some give back from this morning’s moves.

The bank of England are still carrying out emergency purchases through to the 13th of October and in terms of credibility the UK’s will be viewed as poor for some time to come – the damage has been done.

To whit: Standard and Poor’s have put the UK’s credit rating on negative outlook

“Our updated fiscal forecast is subject to additional risks, for instance, if the UK’s economic growth turns out weaker due to further deterioration of the economic environment, or if the government’s borrowing costs increase more than expected, driven by market forces and monetary policy tightening,”

Standard and Poors

Finally Credit Suisse is under pressure this morning after its new CEO reassured employees over the weekend that it has a solid balance sheet and adequate liquidity.

If there is one thing you don’t want a bank CEO to do it is to reassure the markets they have a solid balance sheet and liquidity.

Predictably the bank’s debt is lower across the board this morning and its CDS wider as the market seems to have decided their is no smoke without fire.

Looking at CDS – roughly 260bps – default/ distress are not being priced in but it is nearly 5x the low spread seen in January of c.57bps (normally a distressed issuers CDS curve would be flat, and not quoted in bps, but points upfront).

Net net – especially given the lengths banks have gone to stop name specific risk becoming systematic – we think that this (famous last words) looks to be a storm in a teacup.

However – by declaring nothing to see here – CS is at risk of becoming the market’s latest whipping boy:


Credit

High Yield

High Yield posted modest returns on Friday in comparison to rates-driven Investment Grade and also Equities.

The European, Sterling and Dollar Bloomberg High Yield Indices returned +11bps, +2bps and +18bps respectively. In spread terms +5bps, +4bps and +3bps respectively, with the move in rates outweighing the underperformance in credit.

In terms of single names – Carnival Cruises reported weak numbers with an expectation of Q4 profitability to be breakeven / small negative in Q4 sequentially improving from Q3s net loss. Q3 occupancy levels were at 84%, vs. analysts’ estimates of 86.5%.

Its bonds were down c.-1.3 to c.-4 points on the day in sympathy with its stock which was down c.20%.

In Sterling, Saga, having also posted soft numbers earlier in the week, was down in sympathy with its Carnival, losing c.3points on the day.

Xover outperformed cash tightening to 641 on the day from 662, it is opening up at 656.

Leaders and Laggers

Investment Grade

European, Sterling and Dollar IG returned +45bps, +43bps and -2bps on the day.

In terms of spread performance European Investment Grade continues to march closer to pandemic highs reaching 224 on Friday, +2bps wider.

The same is true for Sterling Investment Grade touching YTD wides, +1bp on the day to z+233. US Investment grade touched its YTD high on Thursday last week reaching Z+165, actually ending Friday -6bps tighter.

As discussed previously I expect to drift wider given weakening corporate fundamentals will come to the fore.

The rates component of bond yields looks to be on an upward trajectory through to November at least with Central banks, particularly the US unlikely to move unless the data is screaming recession by then and/or inflation rolls over.

There was no corporate new issuance on Friday.

Bloomberg reports that 79 of the 135 bond traches syndicated in the European IG corporate market in September; or 58.5% ended the month tighter than their issuance spread.

29 of the 39 non financial issues or 74.4% ended the month tighter – this compares to 35 of 64 or 54.7% of financials ending the month tighter. 21 or 65.6% SSA’s ended the month tighter.

All in all this is positive, especially for corporates showing that non financial deals were relatively well received.

Euro Investment Grade spreads move higher

Rates

Friday saw a positive performance in rates across the board.

Gilts tightened most in the tails c.-12 to -14bps. In Europe, the belly and long end performed whilst in the US the front end tightened the most, bull steepening, c -9bps in the 2-year and c-6bps in the 5-year.

10-year Treasuries, Gilts and Bunds yield 378bps, 408bps and 211bps respectively.


Equities

European equities ended Friday up between +0.9% and +1.5% with the FTSE ending the day up +0.18%.

In the US the rally faded in line with recent performance, although after Europe’s close.

The S&P 500, Dow Jones and Nasdaq ended the day -1.51%, -1.71% and -1.51% respectively.

At the time of writing European stocks are down the -0.9% to -1.5% and the FTSE is down -0.8%.

US futures are flat to small down.


Today’s Events

Eco

Manufacturing PMIs -Italy, France, German, Eurozone and US. US ISM manufacturing.

Reporting
Arytza
Kaufman & Broad

What Has Caught Our Eye


LDI – an Excellent Explainer

The FT published and excellent explainer on how, why and who was likely to be impacted by last weeks move in rates in the LDI space.

Interestingly the piece highlights the rise of higher yielding and illiquid assets on insurers’ balance sheets a function of the now defunct “lower for longer” regime

But to reiterate for the umpteenth time, solvency isn’t the issue. For a well funded scheme with a gilt benchmark (which describes most of them), higher yields are good. Future liabilities are discounted at higher rates. Solvency ratios improve materially. The issue is that the LDI strategies are (by design or accident) anti volatility, and even a well-funded scheme needs to meet its margin calls to survive.

Bryce Elder, FT

Keep an Eye on CPI

Pictet Asset Management this morning flagged that Eurozone CPI as measured by their “Super -Core” indicator continues to peak. Super-core is HICP items less food and energy, including those sensitive to slack measured by the output gap. Although they do see some decline in Eurozone price pressures.

Bottom line – they see a 75bps hike as the likeliest outcome for the next ECB meeting.


Performance

High Yield


Investment Grade


Rates


Equities


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