1st December 2019

Pre-Holidays Strategy

iTraxx Main

47.7bp, -0.3bp

iTraxx X-Over

220.8bp, -1.6bp

🇩🇪 10 Yr Bund

-0.36%, unchanged

iBoxx Corp IG

B+115bp, unchanged

iBoxx Corp HY

B+383bp, -2bp

🇺🇸 10 Yr US T-Bond

1.76%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Equities performance out in front, fixed income stellar…

Not long to go now in order to clip the kind of performance that is the stuff of dreams. We closed November with risk markets having a final session give-up but having garnered some excellent performance this year.

Records have gone in US equities as the S&P is up by over 25% this year so far. The Dax is up there too, the total return index up 25.3%, whilst the FTSE is up only 9.2% this year in comparison (Brexit/political woes), it could be the ‘go to’ equity market in 2020 if Boris Johnson gets his working majority and funds pile back into UK equities in some sort of relief trade.

IG credit has made 6.4% so far, HY credit 9.6% and the AT1 market over 14%. The primary market has seen records smashed in IG, they’re closing in on the high yield record (still 2 weeks of business to go) while there has been a stellar recovery in senior bank primary supply. And rates. Total returns are just a shade shy of 8%. Fantastic.

Stay with it into 2020. As those credit strategy calls and decisions are being made, we think there is little reason to change anything. Cliff risk seems remote, especially in the US as policy across the board remains accommodative with a dovish Fed amid controlled inflation. It’s a different story in a stagnating Europe, but markets have shown that they can trade a sustained low growth environment.

It’s not going to be anywhere near as good in 2020, but staying slightly long portfolio duration and overweight credit beta will generate positive returns.

We would overweight triple Bs vs single As and overweight single Bs versus double Bs, as well as overweight AT1 versus HY will still work. IG looks rich as does corporate hybrid debt, but these two categories have a natural bid from investors and we would anticipate a stable market albeit with a tightening bias.

Primary set to slow, but not before HY record?

We closed November recording the best month for issuance in the European high yield market, as €15.2bn was issued which took the 11-month total to €72.8bn. It has left the market needing just €2.2bn in December for a fresh annual record for issuance.

The market will slow in December, but we are of the opinion that €2.2bn could get away in the high yield market before it closes at the end of the second week of the month. Interestingly, the volume of deals both in IG and HY has failed to dent the performance of the market as highlighted above.

Obviously, the rate rally has boosted total returns but spreads have ratcheted tighter this year, too. The particular dynamic highlights how cash has poured into credit funds in 2019, and we do not think we will see a material outflow in 2020 (first half anyway). The only concern might be the ability for funds to attract fresh sizeable inflows.

Anyway, November’s IG non-financial issuance of €36bn made it the second best November since 2014. The total year to date of €314bn is obviously a record for any year. IG primary just sat through a quieter week but we are hopeful that €5bn+ will get on the screens in the next two weeks. There is life still in the market for any opportunistic borrowers.

Two weeks of meaningful biz left

We might have ended the week with equities in retreat, but even as the S&P declined 0.4% off the record high in a shortened session, US stocks overall recorded an excellent month. For now, the potential successful conclusion of a ‘phase one’ deal is overriding concerns China might have on Trump signing that bill supporting the Hong Kong protestors.

In Europe, the FTSE lost nearly 1%, the Dax closed flat and US markets closed up to 0.5% in the red. Rate markets closed unchanged leaving the 10-year yield on the Gilt at 0.705%, the Bund at -0.36% and on Treasuries at 1.76%.

IG cash closed last week’s final session perhaps better bid for choice, but that left the index effectively unchanged and for the week as a whole, IG ended a touch tighter (B+115bp, iBoxx index). It doesn’t look as if we are going to get much movement in secondary from now until year-end, where the predominant buyer is going to be the ECB.

It was a similar picture in the session for the AT1 market, the index edged to B+437bp (-3bp) but that was 37bp tighter for the week – the tightest level this year (-272bp). The high yield index also edged tighter, to B+383bp (-2bp) which is also the tightest level this year (-140bp).

Surprisingly, credit index was better offered (lower) and outperformed equities, but that might have been due to some month-end trades closing out. iTraxx Main closed at 47.7bp (-0.3bp) and X-Over ended at 220.8bp (-1.6bp).

As for this week, US equity markets will be focused on the retail sales numbers from the weekend sales (initial soundings suggest a subdued Black Friday), and we finish the week with the November non-farm payrolls report. Expectations are for 175,000 job additions, average hourly earnings to come in at 3% and the unemployment rate at 5.5%.

Sandwiched in between, we have global manufacturing data as PMIs are released across the board on Monday, service sector PMIs are out Tuesday/Wednesday and German factory orders are the main report on Thursday before that employment report sees out the week.

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.