6th October 2019

Hold on tight

iTraxx Main

57.9bp, -1.4bp

iTraxx X-Over

250bp, -2.3bp

🇩🇪 10 Yr Bund

-0.58%, unchanged

iBoxx Corp IG

B+125.3bp, unchanged

iBoxx Corp HY

B+428bp, +6bp

🇺🇸 10 Yr US T-Bond

1.52%, -1bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Global macro dominating the landscape…

We’ve hit a difficult patch. The data suggests that we’re heading into slump territory. Either way, there’s something new to ponder. That is, the slowdown in manufacturing and services – globally.

Of course, we knew that it would come – and the recent PMI data for these sectors (published last week for September) tell us that there is little doubt that the global economy is slowing, and rapidly. However, it is a slow-burning fuse and not the cliff risk event that will completely derail the markets. Markets are thus in the process of adjusting. But we have observed many times over the past decade, those very same markets have a habit of brushing away the concerns after that period of soul searching.

This time, though, it is recession risk. We’re pretty much already in one inside the Eurozone & UK and the data ought to confirm this over the next few weeks. The US is slowing and global growth has taken a serious leg lower. It means that government bonds are set to regain their recently faded lustre. As we rally in rates and those yields head lower, we worry little about the direction of the corporate bond market.

We could reasonably expect that some ructions ought to be felt in credit. Ratings transmissions risk will rise as will the default rate. But both come from a low base and investors will be comforted by the low cost of financing for corporates – as well as the liquidity buffers built up over the past few years, resulting in bloated (cash levels on) balance sheets.

In addition, corporates pushing out that wall of funding by a few more years is going to be a great help. The need for additional financing is reduced and should contain any deterioration in their credit metrics coming from weaker macro.

Spread direction will, therefore, be dictated by broad market sentiment. The level and direction and volatility in equities, that is, will be the biggest influence. But then we need to look at the volume of deals in the market and how that might affect secondary levels. We’ve seen this year (so far, anyway) that the answer to it is that primary has had no impact on secondary. Demand has just been too great.

We will have the ECB in the market come November. For sure, there will be some selling into the ECB’s bid as investors book profits into year-end but, generally, we are looking for the central bank’s efforts to support spread markets. For total return investors, there’s little to worry about. Rates are well supported and that will ensure a superb year for all fixed income markets. Eurozone government bonds returning over 10% in 2019 will be a once-in-a-generation, amazing feat.

Primary stutters, but outlook is brighter

We’ve had the proverbial shocker of an opening week for October in the primary market, especially in IG non-financials. As ever, the usual predictions have come unstuck after such a heavy September.

In IG non-financials, we had just two deals for €1.05bn, in HY €800m got away while in the senior market we had a more sprightly €4.75bn issued. In September, the month’s numbers were €49bn, €11.2bn and €13.3bn, respectively – so a long way to go to get even close (which we won’t).

Admittedly, it was a difficult week, especially given the developments on the macro front, and we do look for better as the month continues – particularly in the high yield and IG corporate markets.

Generally, though, we’re going to need a major crisis somewhere to curtail issuance levels to such an extent that we don’t achieve the €285bn from 2009’s record issuance seen in IG non-financials (currently at €252.3bn) or somewhere around the €62bn recorded last year in the HY market (now up at €49.4bn).

Payrolls calm the markets

At least we had a decent non-farm payroll reply, with the US adding 136,000 jobs in September versus the 140k expected, with revisions higher for August amid an unemployment rate of 3.5% – the lowest for fifty years. The pace of annual average earnings in September cooled, though, to 2.9% and down from the 3.2% pace recorded in August.

In themselves, the numbers won’t be enough for the Fed to act at the next meeting, but taken together with the PMIs, there will be calls for them to lop another 25bp off the Fed funds rate. As ever, the incoming data over the next 3 weeks will determine it.

In the rate markets, 10-year Gilts closed to yield 0.44% (-3bp), the Bund was unchanged to yield -0.58% just as the 10-year US Treasury ended to yield 1.52% (-1bp) all in the 10-year. Equities across the board finished the week on a high, with gains across the US bourses of up to 1.5% and in the 1% area in Europe.

Credit index closed with protection better offered (lower) with Main at 57.9bp (-1.3bp) and X-Over at 250bp (-2.3bp).

IG cash closed with little movement as non-farms played their role to keep investors sidelined, with the iBoxx index unchanged at B+125.3bp. There was some moderate weakness in the high yield market, though, with the index up at B+428bp (+6bp).

This week will be dominated by the trade talks as Chinese negotiators are due in Washington ahead of the October 12 deadline for latest tariffs kicking-in on $250bn worth of goods. In Hong Kong, a once peaceful and prosperous region is on the brink of complete anarchy as the face mask ban, under the government’s emergency measures, leaving the situation to worsen as if it ever could. The smart move from Beijing would see a sense of reasonableness and magnanimity restored.

In the UK, it’s going to be about Brexit as we close in on various deadlines surrounding the plan submitted to the EU by the UK government.

Have a good day.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.