Weekly Global Credit Wrap w/e 5 March 2021
Not as exciting as stock moves, but some interesting stuff going on still...
First of all, thanks for taking the time to read the substack this week since most of the action was in the equity market. However, us bond folks like to remind people that the sell-off in stocks was mainly due to stuff going on our market (higher rates + inflation expectations)…
Senate passes $1.9 trillion COVID-19 relief bill
Saturday: 6 March.
The US Senate concluded a marathon voting session on Saturday, passing President Biden’s $1.9 trillion COVID-19 relief bill 50-49. The vote wrapped up a days-long process of debate and deliberation over the relief package. The measure now returns to the House of Representatives for another vote. Source: Twitter
US Jobs Report | Impressive on many counts
US added 379k jobs (BBG consensus: 200k)
Unemployment rate down to 6.2% from 6.3% (BBG consensus: 6.3%)
Wages holding up
38k in upwards revisions for last two months
Most of the job gains occurred in leisure and hospitality, which saw job increases of +355k.
Powell Testimony - Thursday
WSJ summarised Powell’s stance well on Thursday; “Fed chairman says economy is far from employment and inflation goals; he gives no sign the central bank would seek to stem rise in Treasury yields.”
I believe Powell did the right thing in this meeting, but clearly judging by the moves in frothy areas of the stock market, some people wanted more from him. Some of the moves in single stocks looked overdone and even some of the “re-opening” type trades got hurt, suggesting there could have been some closing of profitable positions to fund big losers in momentum stocks. Can’t say for sure this was the case, but it definitely felt like that out there. Charlie Bilello nailed it (as usual) with his chart on how momentum stocks sold off 3x the broader market:
Source: 5 Chart Friday
Fed & US Economics - Sundry items
CPI and Treasury auctions next week, could see more volatility around these events than usual due to sensitivities around inflation and recent poor Treasury auction results
Fed in blackout till next meeting on 16th March
2s10s US curve steepening is real…
Some Hedge Funds have benefitted from rising rates
We learnt over this week and last that a couple of well known long/short hedge funds either had or still have short positions against rates, which would have done well during the ongoing sell-off in Global DM government bonds.
Pershing Square* - UK’s Telegraph article on Fund’s hedge against interest rate rises
Telegraph article touches on interest rate hedge instruments that the FTSE 100 investment trust holds, extract:
“We will see a spike in inflation as early as the middle of the year,” Bill Ackman predicted, according to the Telegraph. “It is already starting to happen. At some point, if rates move enough then it becomes a market risk event.” He said his funds had already bought “instruments that pay off in a large way in the event of a surprising move in rates”.
Full article from 26 Feb (paywall): Telegraph
Odey fund was up 51% as at the end of Feb 2021 due to a short Gilt position | BBG
Odey’s flagship Odey European Inc. fund is up 51% so far this year after gaining a staggering 38.4% last month… huge bet that U.K. government bonds would plunge in value came good as the 30-year gilt yield surged by almost half a percentage point in February, its biggest jump in more than a decade. That wiped more than 12% off its price.
Odey’s fund didn’t just make a modest wager against bonds. At the end of January, it was shorting them to the tune of 800% of its net asset value, according to the Bloomberg News report.
Full article: BBG
AUSTRALIA 4Q GDP EXPANDS 3.1% Q/Q; EST. 2.5%
Nikkei - Australia's economy grew a brisk 3.1% last quarter, marking the first time gross domestic product has expanded more than 3.0% for two consecutive terms in the 60-year history of the national accounts.
Could we see similar stats come out of other big nations?
German factory data showed strength in international orders vs domestic
Extract (AP) — German factory orders rose more strongly than expected in January, a promising sign of strength in Europe’s largest economy, official figures showed Friday.
The Federal Statistical Office reported that industrial orders rose 1.4% in January over the previous month when adjusted for seasonal and calendar variations, double what economists had been predicting. A 2.6% drop in domestic orders was more than offset by a 4.2% increase in foreign orders, the office reported. Germany’s economy has been doing better than several others in the 19-country eurozone as it was supported by manufacturing, which has taken less of a hit than services during the pandemic.
ECB Meeting next week, recent comments by Board members listed
All looks pretty dovish, will they stick to the script?
Inflation expectations over next 5 yrs surge | TIPS ETF saw largest one-day outflow
Costco Conference call transcript touched on inflation:
“Well, I'd say in the last several months, we've seen a little more inflation than we had in part because of some of the container shortages. Freight costs are a little higher. There are some high-demand items or product shortages due to supply chain in general that have gone up. When asked on a broad stroke basis on some of these items what type of inflation are we seeing, sometimes it's as much as 2% to 4%, sometimes less than that. And on meat, it's trended upward in the mid-singles. Pork, in the high singles. Source: Link
*CREDIT NEW ISSUES*
Junk Bonds Set First-Quarter Record With Sales Near $100 Billion |BBG
…and is closing in on the fourth-busiest quarter of all time. It’s all the more impressive given that high-yield funds have experienced three consecutive weeks of outflows that have grown steadily in size, according to Refinitiv Lipper data. BBG Article.
Flurry of convertible bond issuance
A handful of brand name convertible bond issuers came to market in the past few weeks, namely:
Besides Airbnb, each of these converts have traded down vs issue price driven by the sell-off in stocks in week ended 5 March 2021. What is interesting is that each of these were issued with a zero coupon.
Recent Convertible Bond from MicroStrategy hurt by halving of share price
Bitcoin fans might be vaguely interested to know that the recently issued Convertible bond from MicroStrategy ($5.9bn market cap US Company) has traded down to around a cash price of 85 after being priced at 100.0. Note that the stock has halved vs its recent peak on 9th February. Microstrategy is the company which is holding a significant (if not all) its liquid investments in Bitcoin, and actually raised the recent Convertible bond issue to buy more!
Brazilian Beef producer Minerva issued 1bn of bonds (rated BB) @ 4.375% for a 2031 maturity
UK’s Workspace Grp Priced its First Green Bond (Real Estate)
Extract of company statement:
“Workspace Prices First Green Bond £300m at 2.25 per cent. Guaranteed Green Bond due 2028
Workspace Group PLC (the "Company") is pleased to announce the pricing of its first Green bond, a sterling-denominated senior unsecured guaranteed green bond issuance in an aggregate principal amount of £300million and for a term of seven years (the "Bonds"). The Bonds will bear interest at a rate of 2.25 per cent per annum. This follows a series of fixed income investor meetings which generated strong institutional demand.
The Bonds will be issued by the Company and guaranteed by a number of the Company's subsidiaries. S&P Global Ratings UK Limited is expected to assign a rating of BBB to the bonds. It is intended that the Bonds will be admitted to the Official List of the Irish Stock Exchange plc trading as Euronext Dublin ("Euronext Dublin") and to trading on The Global Exchange Market of Euronext Dublin.
Following the issuance of the Bonds, the Company's weighted average debt facility maturity will increase from 3.9 years to 4.9 years and its weighted average cost of debt will reduce to 3.6 per cent on a pro forma basis.
The Bonds are to be issued in connection with the Company's new green finance framework (the "Green Finance Framework"), in line with Workspace's ESG 'Doing the Right Thing' strategy and its recently published net zero carbon pathway. The proceeds will be used to finance or refinance eligible green refurbishment and redevelopment projects, reinforcing the key role Workspace plays in the employment-led regeneration of areas across London as a long-term owner of historic and character buildings in the capital.”
Cinemark - US Cinema chain issued 2026 paper at 5.875% | Rating Caa1/B/B
I decided to dedicate a new section to the economic re-opening. There are already some fantastic substacks/blogs that cover this topic so will link to their content as well as inserting things I have seen here myself too.
Lyft - Ride hailing service co reports best week for volume since March 2020
Rideshare ride volume during the week ending February 28th reached a new record level for 2021 and was the Company’s best week since March 2020. Source: Rational Research
ScottsMiracle-Gro noted sales of its product at retail are up 25% year to date
Source: Rational Research
Costco reported a 10% comp in February (23% on a two-year)…
…as they begin lapping Covid stockpiling which started the last week of February 2020 Source: Rational Research
UK Discount Pub Chain Wetherspoon is set to re-open beer gardens…
roof top gardens and patios at 394 of its pubs (nearly 50% of its total estate0 in England from Monday 12 April. Evening Standard
UK - Nearly 30 licensed premises are closing a day - highest rate on record…
according to the latest Market Recovery Monitor from CGA and AlixPartners. Nearly 12,000 licensed premises have closed in Britain since December 2019. This should bode well for chains/operators that manage to survive.
BIS wrote a piece on Bond ETF arbitrage
Extract: Exchange-traded funds (ETFs) allow a wide range of investors to gain exposure to a variety of asset classes. They rely on authorised participants (APs) to perform arbitrage, ie align ETFs' share prices with the value of the underlying asset holdings. For bond ETFs, prominent albeit understudied features of the arbitrage mechanism are systematic differences between the baskets of bonds used to create and redeem ETF shares, and a low overlap between these baskets and actual asset holdings. These features could reflect the illiquid nature of bond trading, ETFs' portfolio management and APs' incentives. The decoupling of baskets from holdings weakens arbitrage forces but allows ETFs to absorb shocks on the bond market.
Bond exchange-traded funds (ETFs) have grown to manage more than $1.2 trillion of assets globally.
The arbitrage mechanism, which keeps bond ETF prices aligned with the value of the underlying investments, operates differently from that of equity ETFs.
This difference potentially makes it harder for investors to exploit price gaps but allows bond ETFs to absorb shocks and withstand market stress.
My two cents - Firstly its worth mentioning that I work in the mutual fund industry, as such I have my biases. I do not necessarily disagree with the point that Bond ETFs can absorb some market stress. However, what cannot always cope is the underlying corporate credit market which tends to move slower and be less liquid. These problems are made worse when paired with benchmark constraints. E.g. when Occidental Petroleum got downgraded to HY during early 2020, IG bond ETFs needed to unload, but there were no immediate buyers of size for all the OXY paper out there. And this was why benchmark ETFs were given more time to transition the holdings from IG Bond ETFs to HY and Fallen Angel ETFs. These sort of dislocations are also sources of great opportunity for new investors that can provide liquidity. Of course, the Fed signaling its intent to backstop HY bond ETFs saw huge amounts flow into HY ETFs, which helped smooth the transition massively.
The piece from the BIS around Bond ETFs is quite timely. Take the iShares 20+ year Treasury Bond ETF ($TLT) which has returned minus 11.7% YTD. This has been due to the cheapening up liquid long end Treasuries. Furthermore, momentum stocks have reacted very badly this week due to not getting some dovish statements from Chairman Powell. How will the less liquid US HY market (and HY ETFs) react when discussions start around the Fed effectively stepping back from supporting corporate credit?
Looking at dealer commentaries for this week, a common theme was the presence of ETF selling of bonds due to widening discounts on the ETF. This appeared to result in a modest amount of loose bonds that were either absorbed by clients or dealers. However, when discounts widen meaningfully (usually during periods of high volatility) and buyers are hard to come by, that’s when bond prices get hit harder.
Bond Trading Platforms’ stocks got hit hard in the week’s sell-off (MKTX/TW)
Hertz has a plan to emerge from bankruptcy
Extract from CNN: Two investment firms have agreed to pay a combined $4.2 billion to buy Hertz and take it out of bankruptcy by the early to mid-summer, another sign of growing hopes of a recovery in travel.
The deal announced Tuesday would have the two buyers, Knighthead Capital Management and Certares Opportunities, buy at least a majority and as much of as 100% of the company. The plan would need the approval of the bankruptcy court.
Although not confirmed, there is a possibility that Hertz is taken private.
Good example of how rates has impacted HY - Netflix
Netflix’s 2030 EUR bonds rated BB have traded down around 5% in price terms compared to early February when there was news of positive credit ratings momentum for Netflix. Being a relatively low yielding bond (1.6% in EUR ~ 2.4% in USD) means that it is more susceptible to the rates sell-off than a single B or CCC rated shorter dated bond. This is just one example, but gives a good idea of the re-pricing going on in parts of the credit market.
BBVA’S EUR 8.875% AT1 bond will be redeemed on April 14th
This is a bond known and liked by many in the AT1 community. What’s there not to like? -Big coupon (8.875% in Euros!) for one of the biggest and best Spanish Banks. Goodbye old friend…!
China Sets GDP Growth, Budget Deficit, Job Targets for 2021 -
Sets economic growth target of above 6% for 2021
China plans 2021 budget deficit at 3.2% of GDP vs 3.6% year ago
Plans 3.65t yuan of special local govt bond sales in 2021
Aims to add more than 11 million urban jobs in 202
Targets surveyed jobless rate within 5.5% in next 5 years -
Sets 2021 CPI growth target at about 3% -
5-Year plan doesn’t give numeric average GDP growth target
Will not make sharp turn in macro economic policies in 2021
Money supply growth to basically match nominal GDP growth
To keep macro leverage ratio basically stable
To keep yuan basically stable at reasonable level
Plans to cut carbon emissions per unit of GDP 18% by 2025
China Pledges to Tackle Housing Problem in Biggest Cities
- “We will address prominent housing issues in large cities,” Premier Li Keqiang told the National People’s Congress in Beijing on Friday. “We will make every effort to address the housing difficulties faced by our people, especially new urban residents and young people.” - Li repeated President Xi Jinping’s mantra that houses are “for living in, not for speculation” in the report, signaling that policy makers may maintain a tight rein on the bubble-prone sector - “We will keep the prices of land and housing as well as market expectations stable,” he said - In a new five-year plan covering 2021-2025, China said the government will press ahead with the legislation of a property tax, a policy previously raised yet never executed.
Yields on USD EM corporate debt have risen to the highest since November
Oil price strength supportive for EM Oil exporters
Brent Crude oil price nears $70/bbl is positive for many of the oil exporting EM nations, e.g. Angola, Oman, Saudi Arabia, Nigeria, Kazakhstan, Russia. I’m sure I have missed a few, but those are the first ones that come to mind.
Colombia bonds tumble as downgrade risk increases | Reuters
Extracts of article: “Colombia's dollar-denominated bonds fell on Friday to their lowest in eight months as a government financial health warning fanned worries the country could lose its prized investment grade credit rating awarded a decade ago.”
Colombia is currently rated the lowest investment grade BBB- and on a downgrade warning with both S&P Global and Fitch.
"Colombia may risk losing its investment-grade status over President (Ivan) Duque’s tax reform package," analysts at Citi said.
Its worth mentioning that most EM Bond Funds don’t have as many restrictions around ratings as DM Investment Grade funds do. As witnessed with Pemex say, the handoff from IG to HY for benchmark investors was gradual, and while spreads did widen, there was plenty of prior signaling which meant there was no one single large market event as a result of the downgrade.
Shipping company upgraded: CMA CGM
Extract from S&P re: CMA CGM: X-S&PGR Upgrades French Container Liner CMA CGM To 'BB-'
-- We now expect France-based container liner CMA CGM S.A. to outperform our October 2020 base-case. EBITDA in 2021 is likely to exceed the strong level achieved in 2020 because of record-high freight rates, recovering global trade, and our expectation of the container shipping industry's continued tight capacity management. -- Stronger-than-expected cash flows, largely deployed to reduce adjusted debt, have helped to increase the cushion under the improved credit measures for future fluctuations in EBITDA and unforeseen operational setbacks. -- We are therefore raising our long-term issuer credit rating on CMA CGM to 'BB-' from 'B+' and the issue rating on the group's senior unsecured debt to 'B' from 'B-'.
S&P Revises A&T Outlook To Neg From Stable; Affirms Ratings
S&P Revises Outlook on Verizon to Stable From Positive
S&P Affirms Heathrow Funding Ratings; Off Watch; Outlook Neg
UK’s National Grid downgraded by 3 agencies
All three main ratings agencies have downgraded Nat Grid this week after it did not contest OFGEM's recent determination and it did not show flexibility around dividend policy. Fitch’s comment on the matter was as follows (extract):
“The downgrade reflects NG's confirmation on 2 March 2021 to largely maintain its existing financial policies including debt-funded asset growth and dividend growth switching from RPI to CPIH from 1 April 2022 (FY22). Combined with reduced UK-regulated earnings prospects for the upcoming regulatory period (RIIO-T2; from April 2021 to March 2026), the impact of Covid-19 with an uncertain recovery timeframe in the US, as well as NG's increased investment plan, these developments leave NG's forecast leverage and gearing too weak for the previous rating. “
*LINKS / TWEETS*
Amazon’s cashierless tech expands to London with first international store Verge
Ruffer released its 2021 review - Touches on concept of what they call “Jurassic risk”, i.e. the possibility that bonds and equities fall in tandem, challenging the traditional 60:40 portfolio model.
US Treasuries - Third worst start to a year for benchmark treasuries since 1830
Disclosure / Disclaimer: The views expressed above are my own views only, not my firm’s. I may have holdings in some of the investments listed in this substack. This is not investment advice.