20th November 2018

🌊 Wipe out

iTraxx Main

79.5bp, +1.1bp

iTraxx X-Over

331.3bp, +4.8bp

🇩🇪 10 Yr Bund

0.35%, -3bp

iBoxx Corp IG

B+165bp, +5.5bp

iBoxx Corp HY

B+492.3bp, +13bp

🇺🇸 10 Yr US T-Bond

3.06%, 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″]

There’s always someone else worse off…

As we head into the Thanksgiving/Black Friday break, the plight of the market gives us so much to write about. Credit returns in IG and HY currently at -1.6% and -3.3% year to date (iBoxx) are heading for their worst annual performance since 2008 (-4%, IG) and 2011 (-3%, HY), respectively. We have primary supply at relatively depressed levels of late, leaving the full year, in IG, currently at €210bn and will now fall well short of the average seen in the 2014-2017 period (€250bn per annum).

The high yield market, going great guns until September, has seen primary drop sharply – aka Devon Loch proportions, and a potential record year has vanished through a difficult and volatile final quarter. Across the board, event risk maligned corporates have been punished by credit investors, hard. But it’s worse elsewhere.

We’ll take all that in credit, especially if we could close out now. The Dax is off by more than 14% this year after all. And other equity markets except the US are close to or at negative double-digit losses this year. US markets turned negative for the year again during the session – and just think, a few weeks ago, they were up by over 10% and at record highs. Crypto is crashing. Oil is flat year to date having dropped by over 25% in the last quarter from a near 5-year high. There is panic in some markets (equity tech), but it isn’t a systemic issue, yet. The bid for safe-havens is relatively modest when set against the kind of declines we’re seeing elsewhere.

Brexit is reaching a vital point with PM May in Brussels for further discussion on the agreement on Wednesday evening, the Commission set to vote on it at the weekend and then that December vote in the UK parliament. Maybe she will have to face a vote of confidence in between. And we still have the Italy/EC budget stand-off. Where’s Trump when we need him?

In Tuesday’s session, we had risk take another major tumble, not helped by sharp falls in the US overnight and futures pointing to further significant declines. European stocks were bearing the brunt of it with the Dax feeling the chill on any equity market sell-off. The German stock market has performed particularly poorly this year, the country’s industrial sector at the mercy of any (fears of) slowing macro.

As for credit primary, the US’ medical device manufacturer Stryker Corp was due in the market on Tuesday with a multi-tranche offering – according to some. But following severe falls in US stocks and now a follow-through here, they’ve likely needed to hold off – until next week. Specifically, they’ve become a victim of the immediate volatility (as such) but whether primary has also suffered much amid the broader market volatility is open to some question.

Through the year we have had plenty an opportunity to get deals away when the window has been open. But the deal flow has come in fits and starts. Borrowers haven’t particularly jumped through hoops to get deals away when the going has been good. And, as stated earlier, the volume of supply has disappointed through the year. We never looked close to getting up to close to the average the previous few years. The last deal in IG non-financials was the blockbuster €7.5bn multi-tranche offering last week. Stryker will likely get its deal away. For the rest, opportunity will knock.

Going cold turkey, great timing!

This is no time to be looking at potential entry points. Many markets are hitting their low points for the year. And it could get worse. There isn’t necessarily an air of crisis, and systemically we are sound, but there is some sort of re-rating going on for both equities, commodities and credit. Policy accommodation is being removed and we’re now feeling the chill. Into the glaring headlights, there is little we can do. Especially in credit.

Secondary market liquidity has been friendless all year (for several years even), and it isn’t going to be accommodative right now. Most of the corporate bond market is sound, but there is obviously contagion risk and no small fear when the situation around the likes of what we have seen with Renault and say Telecom Italia of late erupting. And with those lower equities, some parts of the credit market look too rich – subordinated bank debt (AT1) and/or the high yield market. So, lower prices go.

US markets were all over the place. The S&P and Dow tumbled by over 2% at one stage, the Nasdaq by 3%. European stocks were up to 2% lower at the worst. We managed to salvage some of it by the time the European markets closed. The Dax closed down by 1.6%, the FTSE by 0.8% while at the time of writing, there S&P was 1.7% lower, the Dow 2% in the red and the Nasdaq by 1.6%. Brent oil was down by 7%.

The bid for safe-havens was only marginally better/mixed, however. The 10-year US Treasury yield at 3.06% (unchanged) and the Bund 3bp lower in yield at 0.35%. 10-year BTPs saw a recent high yield of 3.71% before settling to yield 3.63% (+5bp).

Synthetic moves were not as large as in the previous session, but the cost of protection rose nevertheless. iTraxx Main was up at 80.6bp (+1.1bp) and at the close X-Over was at 331.3bp (+4.8bp).

In the cash market, we continued with the angst of the last couple of weeks. Wider. The iBoxx IG cash index moved another 5.5bp higher to B+165bp which equates to 20bp of weakness this month alone. The sterling market moved 5bp wider too. Returns in both tumbled, too (sterling credit to -3.3% and euro credit to -1.6% both YTD), as the underlying failed to rally much in other markets.

The high yield market wasn’t left alone. It also took a whack. The iBoxx index moved another 13bp higher, to B+492.3bp and some 57bp wider this month.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.