Credit Market Daily #46


Good Morning!

It’s FED day and, unfortunately, nothing else matters.

Given the setup for the next week, it may not dominate for long:

Case in point re new data:

Yesterday, the very same JOLTS data that last month caused a huge rally by coming in weaker with fewer openings coming in higher than expected.

This put a dampener on equities and the rally in rates – it just goes to show how low conviction is and it breeds volatility.

This likely means whatever the outcome of the FED, the associated move will be large.

So, as we go into the FED meeting it is worth taking stock of where we are relative to the last Fed meeting which was on the 21st of September.

Year-to-Date Returns – EUR assets outperforming despite the weaker economic outlook or because of the lower rate regime?
High Yield-1334-1395-1334
Investment Grade-1606-2080-1972

Overall PnL has been driven by rates and whilst the rally in Equities and Rates over the past few weeks feels strong, risk assets are still down.

So – there is certainly room to rally.

Aberdeen Asset Management was quoted on Bloomberg as seeing a 20% rally in equities if the Fed were to pivot.

(“Pivot” is now being used interchangeably with “pause” and “slowing the pace of hikes”. An actual pivot to QE is fantasy)

What of positioning? That is still extremely short:

So we have room to rally and supportive technicals – extreme short positioning and institutional cash balances are at the highs.

Suppose the Fed gives forward guidance on the pace of hikes, and suppose that it is slower.

Why would that be positive for risk asset valuations?

Sure – your dividend discount models would not have to suffer increased discount rates and fixed income would find some kind of floor and the Dollar should weaken.

We would also be less concerned that the Fed and central banks will “break” the market by precipitating some systemic financial accident.

But then what?

Well, you would then be forced to look at fundamentals and the growth prospects for the various regions and these are all looking recessionary.

Investors would then be waiting for economic data to weaken to the extent that central banks feel they have slain inflation and could pivot.

All of this though will take 3-6 months or longer.

During this period what is it that keeps already sky-high equity valuations where they are?

Corporate bonds would benefit from the floor in rates and be driven by credit spreads – which have to go higher before they can go tighter.

But, given all in yields would peak there is a good chance that the spread widening would be partially offset by the decline in rates, with quality (IG) likely performing best.

This chart from the Macro Compass sets out asset performance post the FED pivot in 2001 – the bottom line being the FED cut rates 150bps and equities fell another 10%.

Yesterday I said I thought this rally has legs but would likely be cut off at the knees.

I still think this is the case, but there is plenty of fuel to hand should the FED provide the spark.

If we do rally I think FOMO will be driving it, macro and fundamentals will have little to do with it.

The silver lining – if you can call it that – is that an almighty rally would clear out the shorts and put cash back to work.

This in turn would allow capitulation in risk assets (read equity), which would then mark the beginning of the end of the bear market.

Finally, the FED doesn’t want a rally.

It works against their goals.

Central Bank messaging is oft misspoken, revoked or misunderstood so there is a high probability that the initial market reaction unwinds – the pace of the unwind is unknown.

If I were Powell I would be looking for a Jackson Hole 2.0-type presser and trying to remain tight-lipped and lean hawkish.

Let’s see what tomorrow brings.


High Yield

European and GBP Cash indices gave back some of their spread performance yesterday.

The Euro and GBP high yield indices were +5bps (Z+586bp) and 5bps (Z+555bp) respectively. The USD index was flat in spread terms -1bp (Z+478bp).

Overall in total return terms, the cash indices all ended the day high with the EUR, GBP and USD indices up +37bps, +33bps and +10bps.

Xover continued to outperform -13bps tighter on the day at 541.

Looking at the relative value in the context of the rally:

GBP BBs, Bs and CCC’s spreads have gone from 9.8%, 5.4% and 3.6% from the 12-month wides to now being 29%, 23.7% and 8% respectively.

Similarly, Z-scores have moved from above 2, indicating cheap, to around 1, approaching average, not expensive, but not cheap.

The same can be said for Euro HY in terms of distance from the wides – with comparable levels by rating as those seen in GBP.

Z-score wise EUR high yield was already inside 2 when GBP was above 2.

EUR spreads are now trading with a spread Z score of less than 1. Not cheap on this metric.

Overall I think GBP has room to compress further relative to EUR HY, but the meat of the move is done.

USD High Yield – just looks average in comparison to EUR and GBP, but given the size of the market and its exposure to oil and being priced in USD it will likely stay that way.

Leaders and Laggers
Investment Grade

Investment Grade continued to benefit from the move in rates, outperforming high yield – with long-dated, low coupon and high-quality outperforming.

Interestingly, I have seen more people talking about extending in duration, but the consensus is that it is too early yet. People want to be sure of a slowing in the pace of hikes and inflation is in hand.

In terms of where spreads are currently it is essentially a copy and paste of the moves seen in high yield, but with the starting points being “cheaper” and the endpoints being much closer to “average”.



Gilts had a strong day yesterday buoyed by headlines that taxes in the UK were likely to increase to plug the £50bn odd hole in the budget.

Add to this that the BoE was able to start QE – selling £750mm of 3-7year Gilts and you have to think that high fives were being made on Threadneedle street.

Gains were given back towards the end of the day given the data out of the US but overall the Gilt curve bull steepened.

Moves in Europe and the US were flattish and this is the case for all benchmarks this morning, waiting for direction.

10-year Treasuries, Gilts and Bunds yield 404bps, 345bps and 213bps respectively.


Equities were mixed yesterday and remain so this morning with no large moves in Europe / UK.

Futures in the US are also flat.

Today’s Events

Eco Data

European Manufacturing PMIs – Germany 45.1 vs. 45.7 expected, France 47.2 vs 47.4 expected, Italy 46.5 vs. 46.9 expected and Eurozone 46.4 vs, 46.6 expected.

So softer overall, but close to the survey.

In the UK we had BRC shop prices which grew at their fastest-ever monthly pace, retailers passing through costs and highlighting the ongoing cost of living crisis:

External factors are keeping shop price inflation at record highs and the challenging economic conditions are significantly impacting consumer confidence and retail spend. With pressure growing on discretionary spend across both non-food and food retail, delivering good value is the table stake in the battle for shopper loyalty over the next 8 weeks.

BRC, 2nd November
Today’s Reporting
Aston Martin
Smurfit Kappa


High Yield

Investment Grade




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