*OPENING THOUGHTS*
Fixed Income notable market moves
US Treasuries rallied this week with strength in 2s, 3s, 5s, 7s, 10s. The rally could be mostly attributed to the major risk off in equity markets, since inflation still continues to be a problem after a hotter than expected CPI print in the US.
In the Bond ETF space, there are a handful of ETFs that are generating a positive return month to date. Take IGLT ( iShares Core UK Gilts) which is currently positive month to date. IGLT had generated negative monthly returns each month in 2022 upto the end of April 2022.
Within cash credit, spreads keep pushing wider across IG and HY. Trading conditions remain tricky as rallies tend to be sold and lack of certainty over flows (see chart below) mean that “cheap” bonds stay cheap for longer.
There was notable volatility in B-/CCC credits due to a number of idiosyncratic reasons (e.g. Crypto collapse - Coinbase/MSTR, higher input costs - Carrols Corporation) which pushed up spreads on this ratings bucket.
Rising headwinds for Corporations
Corporations are currently facing a number of headwinds, higher input costs, higher funding costs and more employees looking to unionise.
Toyota warned this week of unprecedented’ raw materials cost, while credit spreads across both investment grade and HY markets have surged. On the labour front, there appears to be evidence of power returning to workers. The first proposed unionisation of Apple Store Retail employees is yet another example following the likes of Amazon and Starbucks. There are early signs of rising number of lay-offs by companies which points to a slow down that could ultimately signal a recession.
However news was not all bad as there seem to be some winners in this current environment - Mid Cap E&P companies that are reporting robust cash positions and profitability and Airlines that are reporting increased business travel demand.
EM - Within EM, there was a notable combination proposed between Gol Airlines and Avianca in LATAM. Sri Lanka restructuring situation continues to drag on with the latest development the appointment of a new PM, bonds continue to trade largely sideways between high 30s and low 40s.
*MACRO CREDIT*
U.S. Treasury 10-year futures' net shorts smallest since October - CFTC
“Speculators' bearish bets on U.S. Treasury 10-year note futures were trimmed to their lowest level since October in the latest week, according to Commodity Futures Trading Commission data released on Friday.”
US Mortgage rates rise to 5.3%; highest level since July 2009
US CPI - Main jumps in prices highlighted:
UK - BOE Told More Rate Hikes Needed as Inflation Harder to Tame - BBG
Increase in savings and fixed mortgages weaken transmission Former government adviser, says higher rates needed for longer.
Australia Home buying intentions plummet 21.5pc as rates rise - AFR
“Home buying intention slumped by 21.5 per cent in April and fell by 13.1 per cent over the year – weaker than the average reading for the month as rising cost-of-living pressures rattled buyers, Commonwealth Bank of Australia’s Household Spending Intentions index shows.”
Chips news
Samsung Is Reportedly Planning to Raise Chip Prices by 20% - PCMAG
Infineon Raises Full-Year Forecast Amid Strong Chip Demand
*COMMODITIES*
Copper has fallen to the lowest in more than seven months
Brent extended gains, and closed above $110/bbl this week.
More Oil From U.S. Strategic Petroleum Reserve Heads To Europe - Oilprice.com
Extract: “Europe is set to receive more cargoes of U.S. crude from the Strategic Petroleum Reserve (SPR) as the European Union discusses an oil embargo on Russia and looks to reduce reliance on Russian oil, Bloomberg reported on Thursday, citing tanker-tracking data and sources with knowledge of the shipments.
In April, some 1.6 million barrels of U.S. crude from the strategic reserve made its way to Europe, Smith told Bloomberg, adding: “That’s the largest amount of SPR crude that’s been shipped to the continent based on historical monthly data.”“
Euronav CEO commented on impact of Ukraine/Russia conflict on Tanker Market
“The conflict in Ukraine has driven considerable dislocation in tanker market freight patterns as sanctions and so-called self-sanctioning by market participants has driven ton-mile growth. The uplift to freight rates continues to have momentum as oil supplies have increased driven by higher prices, OPEC+ production rising and strategic reserve releases. Medium term industry fundamentals remain constructive with orderbook ratios at a 24 year low and no new VLCC orders for 9 months. These are being augmented with factors such as US crude exports hitting 4 year highs and evidence that surplus tonnage in key markets like the Middle East is reducing…”
Full Q1 results here.
Side note 1 : Note that the proposed merger of Tanker giants Frontline and Euronav has not been completed, mainly since its largest shareholder CMB opposes this plan.
Side note 2: Sector peer Scorpio Tankers share price has taken off YTD, presumably due to its greater exposure to refined products. Note also that well followed investor David Einhorn of Greenlight initiated a position in International Seaways, another Tanker firm in Q1 2022.
*FINANCIALS*
Munich Re - Operating profit misses estimates as investment result slumps (BBG)
Continuing a trend in other Reinsurers results as highlighted last week in the weekly wrap, Munich Re this week confirmed that it had to write down bond exposures related to Russia/Ukraine. Extract here:
“Munich Re incurred steep losses on Russian and Ukrainian bonds in its investment portfolio and warned of risks to its outlook from the conflict between the two countries, along with volatile markets and the pandemic. The German reinsurer wrote down the value of the securities by almost 700 million euros ($740 million) in the first quarter, or 370 million euros on a net basis”
Deutsche Bank raised US$ 500m via a 3y bond at a yield of 4.162%.
*HY*
CCC rated bonds seeing huge moves this week
In chart action not too dissimilar to those seen in go-go stocks this week, BBG’s @jtcrombie highlights the massive price falls in bonds of Carvana, Microstrategy and Carrols Corporation. The common factor for all of them is that they are all CCC rated credits. As I tweeted earlier this week, Carrols Corp raised money in 2021 at 5.875%..! These idiosyncratic events will likely increase the risk premia more generally in riskier credits.
Carvana Co. says it’s letting go about 2,500 workers — roughly 12% of its workforce - ABC
American Airlines Group CEO concerned on inflation, but SME demand now above 2019 levels
Robert Isom said on Wednesday the carrier was concerned about inflation, specifically fuel, even as travel demand from small and medium size businesses was above 2019 levels.
UK North Sea’s Harbour Energy (HBR) to be added to FTSE 100
Extract from the company: “As announced by FTSE Russell on 9 May, Harbour will be added to the FTSE 100 Index with effect from start of trading on Thursday 12 May.”
Harbour is a BB rated North Sea Oil company that was formed after consolidating the former Premier Oil. The trend of oil companies going up the ranks in key equity benchmarks is a phenomenon in UK/US and Europe.
Cinemas - AMC ended the quarter with $1.3 billion in available liquidity (CNBC)
“Our results for the first quarter of 2022 represent AMC’s strongest first quarter in two full years,” CEO Adam Aron said in a statement Monday.
Cinemas - Cineworld Obtains Waivers From Holders of 2025 Convertible Bonds
Cineworld confirms that it has now obtained undertakings to waive from its holders of its guaranteed convertible bonds due 2025 in respect of events of default arising due to non-payment of amounts due to the former dissenting shareholders of Regal Entertainment Group.
*NEW ISSUES/TENDERS*
CVC Sweetens Yield on €850m La Liga bond to Lure Wary Investors - BBG
Price talk pitched in 7% yield area, which is said to be about 200bps higher than the average yield for the transaction’s BB rating, according to Bloomberg data. This is just a continuation of the theme in most of 2022 of credit investors regaining some pricing power when it comes to new issues.
Burford Capital - Litigation Finance firm sent notice of early redemption of 2022 bonds
£90m 6.50% guaranteed bonds due 2022 are set to be redeemed in full on 25 May 2022 vs the original maturity date of August 2022. Link
Vedanta - Update on Tender offer on July 2022 bonds
As at the early tender deadline VEDLN said it had tendered $468.375mn of the $1bn bond issue, after capping the tender at $500m maximum. SGX Announcement.
*IG*
European IG corporate bonds hit by steepest sell-off in at least 20 years - FT
Extract of FT: “Bonds issued by highly rated companies in the eurozone have lost investors more than 10 per cent since the peak nine months ago, marking by far the biggest decline since at least 2000 for an asset class typically expected to deliver much steadier returns than stock markets, according to an Ice Data Services index.”
Aircraft Lessor: BOC Aviation raised $300mm for 5 year paper at 4.334% yield
Toyota warns ‘unprecedented’ raw materials costs could cut profits by 20% - CNBC
Extract: “The Japanese automaker said it expects materials costs to more than double from to 1.45 trillion yen, or about $11.1 billion, in its fiscal year that started in April.”
Some may recall that Toyota was one of the better prepared Auto manufacturers (for chip shortages), since it stockpiled more than others after it experienced major shortages in the aftermath of the Fukushima disaster.
Apple staff make bid for first union at a US store - BBC
Extract: “Workers at Apple's Grand Central Station store in New York have announced a plan to start a union. If their bid is successful it would be the first union at one of the tech giant's US stores.”
Deliveroo and GMB union sign union recognition deal in UK
In the UK, Deliveroo and the GMB Union signed a union recognition deal covering Deliveroo's covering the company’s more than 90,000 self-employed riders. GMB Union. Note that the power struggle between companies and their workers is not limited to the UK and US, in the Middle East, Talabat drivers are refusing to work until pay demands are met - Al Jazeera.
Tesco is to convert unused shop space into mini offices… - The Grocer
Extract: “Tesco is to convert unused shop space into mini offices as the supermarket seeks to cash in on demand from home workers (The Telegraph). Client meetings and emails could be picked up alongside a pint of milk and a box of eggs under a new deal between Tesco and flexible office operator IWG.”
*EM*
Sri Lanka - New PM (R Wickremesinghe) appointed to stabilise IMF negotiations
Key for new PM is to quell the fears of protesters and get Sri Lanka back on track with its IMF negotiations. Anti government protestors are likely to view Wickremesinghe as another “elite” from the political class, but its yet to be seen whether he will be given the leeway to help get Sri Lanka back on track economically.
Extract of Al Jazeera: “Political analyst Aruna Kulatunga told Al Jazeera that Wickremesinghe “will attempt to first stabilise the political landscape of Sri Lanka by bringing together all the political parties to immediately introduce a new constitutional amendment”.
“This will restrict the sweeping powers enjoyed by President Gotabaya Rajapaksa,” he said, adding that Wickremesinghe will then embark on immediate negotiations with the IMF and the World Bank.
“He will also start bilateral negotiations with traditional donor countries to Sri Lanka, such as Japan, Germany, India, and China.””
LATAM region Rate Hikes this week
Peru hiked 50bps to 5%, the highest in 13 years
Mexico: Banxico lifted its policy rate +50bp to 7% (in line with expectations)
Argentina's CB hiked by 200 bps to 49%, vs inflation of 58% in April
AIRLINES - Gol, Avianca team up in mega-Latin America airline group
Extract from Barrons: “Brazilian airline Gol and Colombia's Avianca, two of Latin America's biggest carriers, said Wednesday they had signed a deal to team up in a new group that will be one of the region's largest. The airlines will maintain their own brands, but will join together under a new holding company called Grupo Abra under the deal signed by their top shareholders, they said in a statement.”
Azul Airlines Looks Beyond Pandemic Expecting Its Best Year Ever - Airlines Weekly
Extract: “Revenues at 3.2 billion Brazilian reais ($625 million) in the first quarter were 26 percent higher than they were three years ago, and that was even with a hit from the Omicron variant in January and February. Passenger traffic was up 15 percent. And Azul turned a net profit of 2.7 billion Brazilian reais, though it posted an adjusted net loss of 808 million Brazilian reais including foreign exchange and unrealized derivative results.”
Azul also mentioned a 40% average fare increase observed from February to April that may be key to sustain margins through higher fuel pricing levels on an unhedged balance sheet.
Chile’s LATAM Air gets backing by unsecured creditors in Chapter 11 exit plan - TDM
Kurdistan oil Cos release robust results, DNO to redeem $200m of 2024 bonds early
DNO - Net debt dropped $126mm QoQ to $27mm. Co. also announced a $200mm partial redemption of the DNO 2024 bond. Announcement.
Genel - Reported a net cash position of $86mm at 31 March 2022. Genel IR
*CHINA*
China’s no. 4 developer Sunac made a local bond payment ~the day after~ it defaulted on dollar debt - BBG
*RATINGS*
Fitch Upgrades Volkswagen to 'A-'; Outlook Stable
This is notable, since VW is a huge issuer in the IG market across currencies.
Fitch Affirms Pension Insurance Corp's 'A+' IFS Rating; Outlook Stable
Aker BP Upgraded to Baa2 by Moody's
X-S&PGR Affirms Swiss Re 'AA-' Ratings; Outlook Negative
CMA CGM - S&P upgrades the rating to BB+ due to solid cash flow and improved credit profile
S&P UPGRADED KOSMOS ENERGY TO 'B+'; OUTLOOK STABLE
X-S&PGR Revises Exxon Mobil Otlk To Stbl From Neg, Rtgs Affirmed
*CREDIT TRADING*
TP ICAP saw broking revenue up partly due to higher volatility from Rates and Credit - Link
Extract: “Global Broking revenue up 3%, benefitting from increased market volatility. Revenue grew in Rates, Credit, FX & Money Markets and Emerging Markets, but was flat in Equities
Group revenue, excluding Liquidnet, up 3% in constant currency. Including Liquidnet, Group revenue up 14%; growth across all business divisions.”
Liquidnet operates in the all-to-all platform space in Credit, and was acquired by TP ICAP in 2021.
*LINKS/TWEETS*
Globally financial conditions are tighter than the US
Institutional investors re-thinking oil trade
Loan returns are -1.44% in the month to date and -1.32% in the YTD: S&P LCD
Most Fixed Income sectors would kill to have returns like that this year! Data to 10 May 2022.
Nowhere to hide…European IG edition
HY bonds now yield 7.4%
US Consumer Credit spike