It is hard to find superlatives for the move in credit protection. Europe is (of course) the biggest sucker, but that shouldn’t be a surprise. Chart showing iTraxx main and CDX IG.
Refinitiv
The spread between equity and credit protection has continued to widen. Charts showing VIX vs CDX IG , and iTraxx main vs V2X. European equity stress remains the biggest laggard, absolutely, but above all relatively speaking.
Refinitiv
Refinitiv
This week, global credit markets broke records, though not in the way we’d like. US IG new issuances continued to disappoint, as only two companies came to market for a combined value of $1.7B – September volume finished at $78.6B, 47% below estimates. Meanwhile, September volume for HY bonds closed at a modest $9B, the lowest since 2011. Following the passage of Prime Minister Liz Truss’s fiscal package and the subsequent market havoc, rates for new sterling bond issuances are 325 bps higher than existing bonds, exceeding the highs in the aftermath of the 2008 financial crisis. (Morgan Stanley)
Goldman’s Scott Rubner with some relevant points:
1. Systematic Macro De-leveraging from vol control, risk-parity and new shorting of trend breakdown from CTA’s
2. Pension Fund quarter-end Equity “de-risk” estimates Supply underestimated by the street.
3. Short Index Gamma is the largest (most short) since GS have been tracking.
4. US Corporates are in peak blackout window (93% of SPX is in blackout window).
5. The movement to Passive investing will exacerbate outflows.
6. Foreign investors saw the largest selling stocks on record.
7. Outright Directional macro delta shorts are consensus.
8. Asset Managers are building a cash pile and raising cash.
9. Mutual Fund year-end September (~$937 Billion) has accelerated some selling (T+2).
The question is where do we go from here. Fear the CS weekend stories or look beyond what has happened already. “Delta” such as the corp buyback will reverse soon…
Barclays
Remember Jan 3 2001? Things were bearish coming into this day and suddenly the screens were too small to the upside. The surprise rate cut saw NASDAQ futures surge almost 23% from lows to highs during this session. Big shorts..and big longs remember…
Refinitiv
“Although the sharp repricing in sovereign debt has resulted in 10y UST yields close to our year-end target, and only about 25bp below the peak levels we project for this cycle, we remain cautious about adding longs. There are a few reasons for our reluctance to go long.
1. First, both as a result of upside risks to growth and the Fed’s reaction function, we believe there are still upside risks to our economists’ 4.5-4.75% terminal rate projection.
2. Second, even in the event of a more immediate recession where the Fed might be expected to cut, assuming historically maximal inversion from the past five decades (excluding the Volcker period in the early 1980s) suggests only about 30-40bp of downside to 10y yields.
3. Finally, we note that opportunity cost of staying in cash versus buying bonds isn’t that high—the short term interest rate is soon likely to exceed the interest on longer maturity USTs”
(Goldman)
There has been a strong correlation between the volatility in UST markets and HG credit spreads, and the elevated volatility this week is contributing to spread weakness.
JPM
G4 Central Banks’ balance sheet -$3.1tn in past 7 months. This has created asset value destruction of 10x-20x magnitude (depending on what you include). Biggest question from now: are we past the “max pain” point or will this just continue and eventually cause something to break for real…?
Flow Show
“While it feels like Wall Street has finally gotten deafeningly loud on the dollar, it could also be too little too late. We looked back as far as the DXY index went and found that typically, the appreciation levels we are seeing is right around where they tend to roll, at a +2SD event”
Jefferies
