Credit Market Daily #33

10-October-2022

Good Morning!

So – a “strong-ish” Non-Farm Payroll and as expected a pullback in US equities. However, the YTD trend in NFP’s has been lower and the jobs market is cooling.

Jobs growth is slowing, rates rises are working

See “What we are watching” below for a 20 minute synopsis of what the NFP numbers mean from Jeff Snider of the Eurodollar University Podcast.

The Fed is having its desired effect, but still too early for a Fed Pivot though. with the market baking in a 75bp rise for the November meeting.

75bps is dialled in for the Fed’s November meet

In terms of ECO data, it is “CPI week” again with inflation numbers from Europe, the UK and the US.

The focus is on the month-on-month move and core components with expectations of signs of slowing at a relatively high level.

What does this mean?

Probably more market volatility with the Wall Street Journal reporting that “The S&P 500 has notched moves of at least 1% in 11 of the past 14 trading days, the most in such a time frame since April 2020, according to Dow Jones Market Data”

Don’t be surprised if we get another squeeze given short positions have yet to be cleared out and for Xover to continue to bounce around in a large 650-550 range.

As for cash, spreads expect them to outperform on the downside and underperform on the upside.

Away from CPI, we will have UK and US Retail sales, UK Industrial production, the FED minutes and the University of Michigan survey.

The thing I am looking forward to is a move from “Fed Pivot Tea Leaf Reading” to Q3 reporting season with the US banks JP Morgan, Citi, and Wells Fargo reporting.

In the non-financial space as well as Pepsi, Delta Airlines and Wallgreens Boots Alliance.

Last and certainly not least the Bloomberg Intelligence Q4 High Yield Survey is out today/ early tomorrow and we have the webcast to discuss the results on Thursday at 9 am.

Register here.

I will make the survey results file available for download as soon as it is available.

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Credit

High Yield

As expected a weak day with continued outperformance of equities and Investment Grade credit.

European High Yield moved +3bps (Z+605bps) bringing its year-to-date return to -14.14%.

Sterling and Dollar High Yield moved +9bps (Z+699) and +6bps (Z+509) underperforming Europe on a spread basis.

As you would expect, bond price dispersion has increased significantly over the last 12 months.

The charts below show that we have moved from a median price of 101.63 in European High Yield to a median price of 86.60.

In Sterling High Yield the median price was 102.20 12 months ago and now rests at 81.74.

We know Sterling has underperformed with lower mean and median cash prices compared to European High Yield, what is interesting is that it had a much wider price dispersion to begin with – i.e. more stressed credit.

Looking at the change in dispersion, European High Yield has actually seen the biggest change and one could argue this is where the bigger opportunity lies in terms of future positive returns – i.e. the move back to a much narrower distribution of higher prices.

The change in the standard deviation of the price distribution has increased the most for European High Yield – starting out at 4.72 and rising to 10.63.

Whilst GBP’s standard deviation started out wide and has remained there moving from 7.48 to 8.83.

Given GBP is a much smaller market – £33.6bn in value vs. €365.6bn for Euro High Yield it makes some sense that the starting dispersion is higher, and suggests name specific risk was much higher to begin with.

High Yield investing in times of stress becomes very much about managing single-name risk – or rather avoiding loss making situations. This is when PMs should be earning their alpha.

The Beta move is the snap back to the tighter price distribution that acts as the tide that lifts all boats, or the gradual leak wider in spreads.

It is also worth noting that both price distributions currently have 2 peaks.

One around a cash price of 90 – the new normal for performing credit, and another around 80, the new normal for riskier names.

Again, this is something to be mindful of as single names can trend between the two peaks, generating PnL opportunities.

European High Yield Dispersion has increased most

Sterling High Yield prices were more dispersed to begin with, and has undergone a shift to the left in terms of rather than a major flattening of its pricing

Leaders and Laggers

No real comments regarding leaders and laggers – beta underperformed, United Group continued to be pressured by short sellers.

Matalan is likely to benefit from Mike Ashely’s announced interest in the company. Matalan will announce Q3 results next Monday as part of the restructuring process.

Investment Grade

European Investment Grade Credit moved +1bp on the day (Z+223).

Sterling and Dollar Investment Grade credit moved +4bps (236) and +2bps (Z+154) on the day.

All three indices posted a negative total return driven in part by spreads, but mainly rates. As you would expect long duration, highly rated low spread names suffered.

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Rates

Rates continue to move wider on the back of last weeks data now that a 75bp hike is expected for the November FED meeting.

Sources of potential volatility this week include the FOMC minutes, CPI and of course the Bank of England removing its backstop for long end rates, with the last day being Thursday.

10-year Treasuries, Gilts and Bunds yield 388bps, 429bps and 217bps respectively.

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Equities

Equities have opened Lower in Europe with the FTSE down -87bps, the Dax down -39bps and the CAC40 down -106bps.

Futures are pointing to the US opening up between -50bps and -80bps following Friday’s give back.

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Today’s Events

Eco Data

Nothing of Note Today

Today’s Reporting

None

What Has Caught Our Eye

“Stocks down big because rate hikes in unemployment rate, while real economy falling apart faster.” – Euro Dollar Univesity digs into NFPs