Weekly Global Credit Wrap w/e 4 Feb 2022
More interesting market with yields and spreads moving wider
*OVERVIEW*
Hawkish central bank meetings from the BoE and the ECB saw Govt bond yields march higher
More money flowing out of Retail HY funds and into Loan funds in the US
New issue markets in EUR and US picking up again after a few quiet weeks
“Well executed” deals are getting done despite the apathy seen in many parts of Global credit markets, for example:
Upsized AMC 1st lien $950m deal
Part of the Morrisons LBO financing which appears to have been placed with private credit investors
UK Insurer Chesnara’s Tier 2 bond got issused at a time when secondary markets have widened significantly in European sub financials
EM - Better tone in Ukraine/Russian Sovereign and Corporates with bonds seeing more two-way action and better tone in EM credit more generally after a difficult 4-5 months, we will see how US hiking cycle affects the current trend
*MACRO*
Rates Headlines/Moves
Yields generally marched higher across the main Govt bond benchmarks. 5, 10 and 30 year are in positive territory in the German curve.
Other notable moves:
2-year Treasury yield posts biggest daily jump since March 2020 after strong January jobs report
U.S. 5-YEAR YIELD RISES TO 1.783%, HIGHEST SINCE AUGUST 2019
Japan Weighs Raising JGB Coupons as Debt Yields Rise, Says Kyodo
*U.S. 30-YEAR YIELD EXTENDS CLIMB TO 2.22%, HIGHEST SINCE JUNE
U.S. 30-Year Real Yield Turns Positive as Fed Hike Bets Increase
Credit spread moves over the week
Further widening during the week in IG cash, particularly in £ and in EUR IG / HY (BoE/ECB follow through?). Xover went out 29bps to 315bps firmly breaking through the 300 mark. Markit CDX NA IG CDS index spiked to highest level in more than a year. Buyers in credit should have more to work with now as yields go higher across currencies.
Cash:
$ IG spreads: 2bps wider to 108bps
$ HY spreads: 3bps tighter to 342bps (but +60bps wider ytd)
$ EM spreads: 12bps tighter to 297bps
€ IG spreads +7bps to 113bps
€ HY spreads +15bps to +368
£ IG +17bps to 138bps
CDS:
5 year Xover +29bps to 315bps
5 year Sub Fins +10bps to 138bps
CDX IG +3bps to 64bps
CDX HY +13bps to 356bps
BoE appeared to surprise the market with its intention to sell down its holding of £20 billion of corporate bonds gradually…
…instead of ceasing to reinvest maturities. LGIM Blog covers the topic well.
ECB dropped its previous suggestion that rate hikes were "very unlikely" in 2022
HSBC Private Banking summarised the ECB meet well: The ECB dropped its previous suggestion that rate hikes were "very unlikely" in 2022, but reminded investors that it is operating in a different environment than the UK and the US so it will "not be rushed" either. An expected reassessment of inflation risks and potential changes in the timeline of asset purchases next month pushed the EUR higher, and the market is now pricing in almost 50bps of hikes.
Australia’s central bank scrapped a bond buying program
Bonds/Loans Flows Data for the week:
Switch out of USHY into Loan Funds continues in retail funds:
IG + HY bonds had ninth largest outflow since 2003 at $10.3b,
Munis and TIPS had largest outflows since March 2020 at $2.2b and $2.4b, respectively while Treasuries had a fourth week of inflows at $2.8b
IG - $69.6 million was pulled from investment-grade funds
HY funds saw an outflow of $4.04 billion, the largest in almost a year
U.S. Loan Funds See $1.317b Inflow in Week to Feb. 3
Sources: BBG/Lipper
Pool of Negative-Yielding Debt Is Now the Least in Three Years - BBG
The amount of negative-yielding securities has fallen to $7.67 trillion, according to a Bloomberg index, the least since 2018. It has slumped almost 60% since a late-2020 peak
U.S. Retail Gasoline Prices Surge to Highest Since 2014
UK Inflation: retailers raised their prices at the fastest pace in more than nine years
Inflation - Starbucks will raise menu prices in 2022 and reduce some spending to offset soaring costs for labor and goods
Pimco Funds Boosts Cash in Preparation for Volatility: Kiesel - BBG
Key phrase highlighted by me below in bold:
Pimco funds have been running at over 10% cash - a higher rate than normal - so that the investment manager can stand ready to capitalize on potential volatility, for instance by providing liquidity to firms when needed, Mark Kiesel, global credit CIO and portfolio manager at Pacific Investment Management Co., said Tuesday on Bloomberg TV.
Market spreads have continued to widen and equities have come under pressure which provides “select opportunities” despite expected volatility, Kiesel said
As central banks all around the world normalize policy, through rate hikes and shrinking their balance sheets, yield curves will further ...
*IG*
Companies raise over half a trillion dollars of debt in record Jan - Refinitiv
Sharp move lower in Corporate Hybrids and Sub Financial ETFs this week
This trend is unlikely to be limited just to ETFS (and Invesco for that matter), but these ETFs were the easiest way to pictorially represent the move: Tickers for below ETFs are “AT1” and “EHYB.”
Jeff Gundlach’s Doubleline betting on BBBs BBG
Alphabet - Amongst other wins, it posted a quarterly sales record for Pixel phones despite supply constraints
Vodafone - Activist Investor Cevian Is Said to Build Stake in Vodafone, CEO looking at potential M&A
GM is seeing signs of an easing in the semiconductor shortage
*EM*
CSN Resources Announces Repurchase of up $300m in 2026 Notes
Ecuador central bank plans to regulate cryptocurrency this year
Mexico - entered technical recession in Q4
Grupo Aeromexico Cleared for Departure From Chapter 11 - WSJ
The Mexican airline settled with unsecured creditors that had resisted the $1.1 billion restructuring plan.
Brazilian Central Bank Raises Selic Rate By 150Bps To 10.75%, as expected
Colombia: the central bank's MPC raised its policy rate by 100bp to 4.00%
Syria - ISIS Leader Killed Himself, Family During U.S. Raid in Syria - WSJ
Petra Diamonds– concludes more favourable refinancing terms - Mining Review
India published its 2022 budget - yields spike..Biz Standard
Green energy set to gain $2.6bn spending boost for local solar manufacturing
Sri Lanka signs $500 mln credit line for fuel with India - RTRS
Sri Lanka: finance minister said the country is asking advice from the IMF on its economic challenges - AFP
Billionaire Agarwal Said to Weigh Vedanta Merger With Unit - Company denies it (BBG)
Russia Moex Equity Index continues to rise despite vol
*FINANCIALS*
European Financials stocks are outperforming financials bonds
As per the chart below Eurostoxx Banks Index (SX7E) is outperforming financials in credit (using the sub fins CDS index to demonstrate). The market is giving the benefit of higher rates to bank stocks, but not to credit. Non dedicated fixed income investors maybe rotating out of high beta credit and into perceived more higher return areas (beaten up growth stocks). This leaves bond inventories which either needs to be matched with a buyer or held by dealers, failure of which results in prices drifting lower.
Chesnara issued GBP200m 10.5Y Tier 2 at UKT+350 (~ yield 4.814%)
Caixa Geral calling its high coupon AT1 without refinancing it
Moody’s upgraded a bunch of Insurance RT1s - Yahoo Finance
Natwest called some of its legacy bonds: link 1, link 2, link 3
*HY*
4 Feb - HYG ETF hit the lowest since September 2020
Junk bonds are increasingly adopting some of the lax terms from the loan market - BBG
Private-Credit Leverage Is Soaring in Scramble for Tech Deals - BBG
PE firm Carlyle Group Inc.’s buyout of Swiss industrial software maker AutoForm AG, which closed last week. Total leverage on the debt was about 12 times the company’s 55 million euros ($62 million) in reported earnings
Containerships - Hapag Lloyd results were very strong Co release
SoftBank’s Fortress weighs debut European CLO deal - BBG
Article states that 20 managers that have entered Europe’s CLO market during the past three years.
Banks Sell $1.6 Billion of Morrison’s Riskiest Debt to Funds - BBG
Cinemas - New issue AMC Entertainment $950m 7NC3 1st Lien at Par to Yield 7.5% (upsized) - Follows another issue (Vistajet) who upsized its issue last month.
AMC to redeem its high coupon debt - Company release
AMC…announced today that it has delivered conditional notices of redemption…to the respective trustees of the Company’s two series of 10.500% First Lien Senior Secured Notes due 2026 and the Company’s 15%/17% Cash/PIK Toggle First Lien Secured Notes due 2026 (collectively, the “Existing Notes”).
Cinemas - Cineworld debt pile set to save cinema operator from bankruptcy - FT
Extracts: “Cineworld is expected to skirt bankruptcy for the second time in two years, say lenders, despite the UK cinema group facing an almost $1bn payout that exceeds its market value for pulling out of a deal to buy Canadian rival Cineplex…
That is because if Cineworld were pushed into bankruptcy by the damages, Cineplex would be near the back of the queue of creditors to be paid, multiple lenders told the Financial Times.”
Source: FT, image taken from r/Cineworldstock Reddit Group
Oil services firm Transocean ($RIG) shares spiked nearly 16% this week…
The move is thought to be due to a case by Whitebox that appears to have been dismissed by the relevant district court. I have not read the docket myself so please DYOR. Oh yes, and oil is at $90+…#OOTT.
North Sea oil firm EnQuest - Provided FY operations update, reduced its net debt.
Key extract: “The Group continues to explore options to refinance its Retail and High Yield Bonds ahead of maturity in October 2023.” Full statement.
*RATINGS*
Angola Upgraded to B- by S&P
Deere Affirmed at A by Fitch
Fitch Revises Ukraine's Outlook to Stable From Positive, Affirms B Rating
Ghana Downgraded to Caa1 by Moody's, Outlook Stable
X-S&PGR Affirmed Rwanda 'B+/B' Ratings; Outlook Still Negative
Hapag-Lloyd Upgraded to BB+ by S&P
Moody's changes Hammerson's outlook to stable from negative; affirms Baa3 ratings
Fitch Downgrades Credito Real’s Ratings to ‘CC’; RWN Maintained
Enel Downgraded to BBB+ by Fitch
Moody's affirms Cinemark's B3 CFR and revises outlook to positive amid cinema industry's continuing recovery
Saipem Downgraded to B1 by Moody's, May Be Cut Further
Saipem Downgraded to BB- by S&P, May Be Cut Further
*BOND TRADING*
Sidenote - I find that analysing the volume / trading stats of the large Bond Trading Platforms is more useful and granular than what we hear from the quarterly earnings in Banks and their discussions on their FICC units.
MarketAxess posted second-highest month of total trading volume ever in January
91% of the credit volume came from institutional trading
Estimated U.S. high grade market share was 21.8%, up from 20.3% in the prior year; estimated market volume down 11% year-over-year
Estimated U.S. high yield market share of 15.3%, down slightly from 15.7% in the prior year; estimated market volume down 2% year-over-year.
Record monthly emerging markets average daily volume of $3.1 billion, up 5% year-over-year; estimated market volume down 6% year-over-year.
CEO Rick McVey’s commentary: “U.S. Credit trading activity rebounded nicely in January after three straight quarters of low credit market volatility, and Emerging Market ADV reached a new monthly record of $3.1 billion. U.S. Treasury volumes grew 40% year-over-year with an expansion of our Rates active client base. We are seeing promising signs of volatility beginning to pick-up in global fixed income markets, creating increased demand for our Open Trading liquidity solutions.”
SRC: Yahoo Finance
Tradeweb - Avg. daily volume (“ADV”) for the month was $1.12tn (+7.6% YoY).
Fully electronic U.S. Credit ADV was up 19.7% YoY to $3.8bn and European credit ADV was up 2.8% YoY to $2.1bn
Credit derivatives ADV was up 37.3% YoY to $13.1bn.
SRC: Yahoo Finance
*ESG*
X-S&PGR Says ESG Influences Almost 1 In 4 Potential Downgrades
EU Takes Step Toward Possible Regulation of ESG-Rating Providers
*VIRUS/VAX*
New York cases are dropping…fast.
Denmark declares Covid no longer a threat to society
Italy will drop restrictions for vaccinated people even in high-risk areas
New Zealand is set to relax border restrictions starting at the end of February.
Daily cases in Germany hit a new record. (On 2nd Feb 2022)
Sources used: Bloomberg/Reuters