Credit Market Daily #55

December 9th

Good Afternoon – things definitely feel like they are ready to wind down, issuance looks to be sputtering and we are entering the holiday season.

Unfortunately for investors next weeks’ CPI data and Central bank meetings are probably the most anticipated of the year so far.

With hopes of a reduction in the size of hikes – a “dovish hike”, whatever that means.

If all 3 Central Banks signal they are slowing the pace of hiking this is likely to be well received by equity markets.

The recessionary narrative and all this entails for earnings is only going to increase as we march through Q1.

I do wonder if this will be come the next meme, but would not be surprised if markets go from slowing hikes to focus on when CB’s will “Pause”.

Fundamentals – pah!

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I updated the UK’s “Fiscal Fiasco Factor” table to see how far the UK’s relative risk premium has performed post the disastrous mini budget.

When we last looked at this was on the 25th-October, which now seems an age away the UK – German sovereign CDS spread was +3.6bps, and had undershot the average of c.5, we are currently sitting +6.8bps.

Looking solely at credit then, the Bank of England and Jeremy Hunt have restored credibility.

Comparing Sovereign govvie yields UK vs. Germany, the spread has tightened to 128.5bps, from highs of 227.5bps and some 12bps tighter then when we last looked at it.

So continued improvement in relative yield measures, but still 1.3 standard deviations beyond the average which suggests there is more work to be done in the rates market.

Finally, looking at UK Gilt spreads vs. the Italian BTP is sitting at -41bps, significantly higher than the -84bps when we last looked at this.

This is somewhat of a reversal and looks primarily due to the out performance of the BTP post the last ECB meeting with the TLTRO rate increasing doing some of the heavy lifting in terms of reducing the need for the ECB to raise rates in an outsized fashion.

Fiscal Fiasco Factor – Credit Spreads normalize, some room to go vs. Bunds and BTPs have outperfromed..

Measure (bps)	Fri 14th Oct	Mon 17th Oct	Change	Spread 5-Year Average	Current Spread Z Score
UK CDS – German CDS Spread	15	14	-1	5	5.67
10 Yr UK Gilt – 10 Yr Bund Spread	199	170	-29	99	1.21
10 Yr UK Gilt – 10 Yr BTP Spread	-45	-68	-23	-60	-0.4

The Bund-BTP spread has performed post the last ECB meeting

@Slogger posted on the Upgrade / Downgrade ratio yesterday on our feed. It should come as no surprise that the ratio is heading lower.

Interestingly the ratio is 1.1x for both Europe and the US.

Just on the Economic outlook alone I think Europe’s ratio should deteriorate faster than the US’.

However, Energy forms a large part of the US High Yield indices (14.75% vs. 7.1% in Eur-HY).

Oil prices have given up their gains for the year on the back of growth concerns and Brent and WTI are now hovering around $77 and $72.

For those who are familiar with our quarterly High Yield Investor Survey that we run with Bloomberg Intelligence and have tuned into our webinar a price of $70 /boe is where US energy credit begins to feel the pinch.

So a material further fall in oil prices into 2023 could have an impact on US HY credit spreads and might lessen the relative under-performance of European Credit in terms of the Upgrade / Downgrade Ratio.

Oil price forecasts for WTI 2023 are higher than this though, the EIA has $86.36 penciled in which is c.3% lower than its previous forecast, but suggests any further falls in WTI may be temporary.

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Credit

High Yield

The EUR, GBP and USD High yield indices were -12bps (Z+516), -1bps (Z+714), +17bps (Z+468) respectively.

XOVER is c. 8bps tighter at 462 on the day, outperforming equities, perhaps on the back of the higher than expected reduction in the TLTRO.

Leaders and Laggers

Investment Grade

The EUR, GBP and USD Investment Grade indices were -14 bps (Z+178), -12 bps (Z+201), -14 bps (Z+133) respectively.
The Itraxx Main was tighter this morning by 0.2bps at 91.7.

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Rates

Rates are generally opening wider, with the UK 10 YR 1.3bps, German 10 YR 3.7bps, and the French +3.5bps.

The US 10 YR has tightened by 1.3pts, rates volatility remains high, with the move index at 129.54 (covid wides of c.160+). The US 2YR – 10 YR remains markedly inverted at -80.5bps.

The 10-Year Treasury, Gilt and Bund yield bps, 347.1bps, 309.5bps and 184.6bps respectively.

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Equities

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European equities opened mixed with small moves. The Euro Stoxx 600 is down -0.06%, there was a small positive move in the FTSE 250 +0.14%.

The S&P 500 rose by 0.75% yesterday. Futures on the S&P 500 are green +0.21%.

Today’s Events

Eco Data

US PPI Ex Food and Energy came in higher than expected but sequentially lower at 6.2%, from 6.7% in October. Not too much to be read into this IMHO – Inflation declining, but still relatively high.

US Capacity Utilization came in at a healthy 82.6%.

We have the University of Michigan Sentiment indicator later today.

What Has Caught Our Eye

Tweets a-Plenty:

Performance

High Yield

Investment Grade

Rates

Equities