Credit Market Daily #63

21-December-2022

Good Morning!

Equities managed to get over the BoJ’s surprise widening of the 10-yr JGB yield band by 25bps yesterday. Rates were less convinced, their yields ending the day higher but not as high as they moved on the news.

I am still getting up to speed on why the move by the BoJ was seen as so consequential, but essentially the crux of the matter is it would encourage investment flows back to Japan and the selling of foreign assets as yields at home become more attractive.

However – it’s a bit more nuanced as a lot of selling of foreign bond holdings by Japanese investors has already occurred driven by the cost of hedging these assets back to JPY.

This thread is a good summary:

Lastly, and perhaps most importantly investors are talking about the BoJ actually raising rates in ‘2023 and market expectations are pointing to increasing yields.

Yet another Market vs. Central Bank narrative is developing:

#Yield update!
The Japanese 10-year Government Bond Yield is closing in on the new maximum yield curve control level of 0.50%

But the swap market is pricing the 10-year yield at almost 0.80%, revealing they expect higher yields to come. pic.twitter.com/krdmXCWclZ

— jeroen blokland (@jsblokland) December 21, 2022

This morning rates are opening up slightly lower in yields and equity futures point to small gains,

The most important thing is whether the equity market can hold onto the gains, especially in the US.

January remains the real test as markets await investors coming back to their desks.

We do have the PCE numbers on Friday, being the FED’s preferred inflation measure this could be a catalyst for a move in equities.

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Credit

High Yield

High Yield cash was softer yesterday, slightly underperforming Equities.

Cash credit spreads have still to play catch up with derivatives.

GBP, EUR and USD spread moves were -5 bps (686 bps), +2 bps (511 bps) and +0 bps (476 bps) respectively.

The Itraxx Crossover is currently 497, some -7bps lower than yesterday’s close.

The Xover Main ratio remains elevated but in from recent wides of 5.22x now at 5.13x as Main has underperformed.

We still remain above the 10-year average of 4.62x.

Leaders and Laggers

Investment Grade

IG indices ended the day with negative total returns for the day, underperforming High Yield and Equities.

This is not surprising given the continued pressure on rates.

GBP, EUR and USD spread moves were +1 bps (196 bps), +0 bps (173 bps) and +2 bps (136 bps) respectively

Itraxx Main outperformed cash on the day -1.5bps to c.96.5bps

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Rates

Rates remained under pressure following the BoJ’s announcement yesterday,

Treasuries bear steepened on the day as did Gilts. Bund yields shifted higher by some 2-3bps higher across the curve.

Gilts and Bunds look to be opening slightly lower in yield this morning by -1 to -2bps across the curve.

10-year Gilts, Bunds and Treasuries yield 358 bps, 229 bps and 369 bps respectively.

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Equities

Equities were mixed yesterday but gave back most if not all of the early losses in Europe and the UK whilst ending green in the US.

Futures are pointing to a continued rebound with Europe and the UK up c. +20 to +65bps and the US up c. +40bps.

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Today’s Events

Eco Data

The Llyods’ UK Business barometer came in at 17 vs. 10 previously (see “what caught our eye” below).

German consumer confidence continues to improve marginally from the bottom coming in at -37.8 vs. -38 expected and -40.2 previously.

Later we have the US Conference Board Consumer Confidence.

Today’s Reporting

Carnival

Pheonix Pharma

What Has Caught Our Eye

Llyods: UK Business Barometer

This morning saw Llyod’s monthly survey of 1,200 UK net businesses confidence rise MoM from 10% to 17%, the first rise in the measure since May, signalling some bounce back in sentiment.

• Overall business confidence increased by seven points to 17%, the first rise since May this year.
• Confidence in manufacturing increased, ending a six-month decline, and construction rose to a six-month high.
• Firms’ hiring intentions improved, recovering from an 18-month low.
• Eight of the 12 UK regions and nations saw a rise in business confidence, with the most confidence seen in the North West and North East.

The confidence in construction is really interesting given the housing data and expectations for a slowing in construction projects making headlines of late.

Overall optimism is anchored by an expectation of better seasonal trading, so needs to be taken with a pinch of salt when thinking about this signalling an upward trend.

Inflation wise:

Wage growth also features with 26% of firms anticipating pay rises of 3% or more.

62% of businesses are expecting to charge more in 2023 driven by rising costs.

“Wage growth is expected to remain high for now as retaining existing staff and attracting new talent will continue to be priorities for many businesses going into next year.”

Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking

BlockWorks Macro on the BoJ announcement:

As mentioned above I am still parsing/ reading up on the true impact of the BoJ’s move.

I have yet to watch this but include it as I am a big fan of the BlockWorks channel and in particular the Forward Guidance Vlog.

I will be settling down to this with a Coffee once the daily is out.

Performance

High Yield

Investment Grade

Rates

Equities