Credit Market Daily #35

12-October-2022

Good Morning!

There seems to be an increasing incidence of Foot in Mouth disease in the UK.

Andrew Bailey, the BoE Governor set the Pound lower along with US stocks with this blunt one line:

“We’ve announced we will be out by the end of this week. My message to the [pension] funds is you’ve got three days left,”

Andrew Bailey, 11-Oct-22

In the context of markets used to testing Central Banks’ resolve, it may prove a red rag to a bull.

The fear is that Pension Funds do not have their houses in order and come Friday catastrophe will ensue.

I said I expected more volatility around Gilts this week, I wasn’t expecting it to come from the BoE (perhaps a little naive).

You have to assume that Bailey knows pension funds are in a good place (if not he is a wholesale arsonist).

Already this morning we have had a back channel reversal with the headline: “BOE Signalled Privately to Bankers It May Extend Bond-Buying: FT”, so the Great British Back-Pedal may be in motion.

It is not just Monetary policy that is forced into a volt-face see: “Mohamed El-Erian warns UK to walk back budget or ‘unleash bond vigilantes’”

Ultimately Central Banks should not be there to nurse markets, but equally, they are there to stop any systemic risk from taking hold.

On this point, Frances Coppola makes the point that the Bank of England’s intervention was always about protecting the banks.

The repo facility that was announced yesterday is meant to provide a firewall for the banks , in the face of pension fund forced selling and increased margin calls.

This in turn will facilitate the BoE’s tolerance of mark-to-market pressure generated by pension funds offloading assets

Bailey addressed this angle in his speech, saying “market volatility went beyond bank stress tests.” That in itself is a concern given the amount of capital banks have been made to raise since the GFC.

Bailey, in saying the quiet bit out loud, may have spooked markets more than he wanted, which may perpetuate the interventions he wants to stop.

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Away from the BoE we had the IMF publish its World Economic Outlook, which points to lower growth, sustained inflation through 2024 with emerging economies hardest hit.

About a third of the world economy faces two consecutive quarters of negative growth. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024….

The balance of risks is tilted firmly to the downside, with about a 25 percent chance of one-year-ahead global growth falling below 2.0 percent—in the 10th percentile of global growth outturns since 1970.

IMF, World Economic Outlook, Oct-22

Lastly, the Q4 HY investor survey is out – you can download it and read about the main takeaways here.

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Credit

High Yield

Investors are hunkering down..

The results of the Q4 ’22 European High Yield Investor Survey are out and generally show Institutional investors are hunkering down with defensive positioning across sectors and ratings.

Cash balances are the highest since the survey started and European high Yield is viewed as cheap, but not as cheap as it was in Q3.

European Investment Grade is favored return wise over high yield as is dollar high yield. For the full report see here.

High Yield under-performed on the day relative to investment grade and Equities.

European High Yield moved +15bps on the day (Z+627) returning -44bps on the day. Interesting Xover actually tightened -6bps on the day to 642 and the Xover-cash basis tightened, which is something I think should continue.

Sterling High yield moved +34bps on the day (Z+734) – which again looks to be an out sized move in spreads, pointing to an increase in volatility.

In terms of market technicals there are increasing headlines around corporate bond sales from Pension funds driving prices lower.

Clearly volatility is likely to continue.

Leaders and Laggers

The other name I want to touch on is Medical Properties Trust – yesterday bonds were down – the only news I could see was an announced share buyback. Since then further headlines have emerged that one of its tenants has filed for bankruptcy and a short note from “The Bear Cave” newsletter.

Finally, Virgin Media has been repeatedly on the GBP laggers list for the past few weeks on and off – not huge moves – the odd point here , the odd point there.

The issuer has been flagged as one that was well held by pension funds and as id often the case when selling low beta safe names tend to be the first on the chopping block.

This is anecdotal but timely.

Investment Grade

European Investment Grade outperformed GBP and USD high yield on the day spreads moving +3bps ( Z+227bps) and returning +7bps on the day.

GBP and USD Investment Grade moved +10bps and +6bps on the day with GBP investment grade touching new wides in spread terms at Z+251.

As per yesterday’s post GBP IG is cheap – with the risk spreads widen further.

Vattenfall (A3/BBB+) was the only non-financial in the market yesterday with a multi tranche €1.65bn offering. All trenches price 20bps inside initial price talk with books c.2-2.5x over subscribed on average.

Not gang-busters, but certainly there is appetite for paper.

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Rates

A positive day in rates yesterday with the market’s reaction to the Bailey bombshell and row back currently muted with rates in the front end of the gilt curve flat to tighter and the long end, unsurprisingly wider.

10-year Treasuries, Gilts and Bunds yield 395bps, 453bps and 237bps.

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Equities

Overall a weak day in Europe yesterday with the US giving up gains as Bailey’s speech came through.

This morning we are opening green driven by the BoE row back.

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Today’s Events

Eco Data

UK GDP came in at a negative -0.3% vs. 0% expected, UK industrial production MoM came in at -1.8% vs. -0.1% expected.

Later we have US PPI and FOMC minutes.

Today’s Reporting

None

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Performance

High Yield

Investment Grade

Rates

Equities