Following the Fed hike on December 16th credit markets fell into a normal festive season stupor, with low trading volumes and no new issue activity in the past two weeks. Credit spreads were relatively stable and managed to rebound somewhat from the weakness which beset the first half of the month, however most credit indices still finished the month negative for December and for 2015 overall. The final two weeks did see the typical year-end reach for carry, with notable strength in 2-3yr BBB and BB rated credits.
The week began with heightened volatility and unease concerning high levels of fund redemptions, particularly in High Yield. By Wednesday the market had settled somewhat, and the US Federal Reserve ushered in a new era of interest rates with its first move from zero in 7 years. The market initially rallied on the “slow and steady” rhetoric by the Fed, despite expectations of four more rate hikes anticipated in 2016. In that latter half of the week, ongoing concerns over oil (and energy/mining in general) reversed all of the earlier gains, and treasuries were well bid with US equities turning back to negative on the year. Although price action in investment grade credit remains muted compared to high yield, we saw increased selling in many sectors with financials 3-4bps wider on active trading. There were no new issues priced this week (save for some high grade bank issues in Europe), and with many market participants leaving for holidays we anticipate thin trading until the new year. January is typically a strong month for risk assets, as investors return with fresh outlooks and money to be put to work. There is good reason to believe this pattern will repeat in 2016.
Junk bonds roared into the headlines this week, with talk of fund liquidations and suspended redemptions triggering a panic selloff on Friday and Monday that rocked global risk markets. Many are wondering if this is a sign of things to come as the Fed looks set to raise rates for the first time in almost a decade on Wednesday.
Oil prices fell to an 11-year low which triggered a difficult week for risk assets, in particular High Yield bonds which were broadly down 5% in the past 5 days. Friday saw considerable discussion around bond market liquidity after US High Yield mutual fund Third Avenue suspended redemptions. Investment Grade markets had their worst week since September, although spread moves are considerably more subdued (and liquidity more robust) than High Yield. The Canadian Preferred market was notable for two large Bank NVCC deals priced at 5.5% – similar paper was being issued at 3.6% as recently as March – which drove market prices back to YTD lows. TD, BNS and National Bank were all active issuers in US dollars this week. Unless oil prices stabilize the likelihood of a Santa Claus rally is fading fast.
A choppy week for global risk markets with most major equity and bond markets finishing in the red. Disappointment with the latest round of easing announcements from the European Central Bank, combined with a solid employment report out of the US has set the table for higher rates to finish the year. Credit markets were busy and generally positive on the week; we believe heading into 2016 that a period of gradually rising rates and tepid growth in the US is a better environment for credit than equity. Canadian bank capital received a boost with BMO and BNS both launching successful NVCC sub debt deals, and BNS filing to bring a US dollar NVCC deal in the next week – a first for a Canadian bank. Expect another busy week of new issuance next week and then things to slow down into year end.
A predictably subdued week in credit given the US Thanksgiving holiday. Only $3Bn of new supply in US corporate bonds compared to $37Bn the week before, and secondary trading was largely over by mid-day Wednesday. Spreads were broadly unchanged, with themes from this month continuing to play out (metals & mining underperforming, financials outperforming). In Canada, HSBC managed to raise $1Bn in a 3 year deal that priced with a 10bp concession to secondary spreads and was generally well received despite the large size. Activity levels were more normal in Europe with a number of new deals pricing. Volkswagen spreads continue to recover, as much as 50bp tighter on the week in European markets.
Credit Spreads are marginally tighter after a subdued week in the wake of the Paris attacks. Spreads in commodity related sectors (Mining, Oil & Gas) continued to widen this month, while Financial spreads tightened. The Canadian market continues to outperform US & Europe due to a lack of supply. Three new deals in Canada this week were well received, including Choice Properties REIT which saw excellent demand despite zero concession. In the US supply continues at a brisk pace. US Mutual fund and ETF flow data suggest Investment Grade funds continued to see marginal inflows this week, compared to significant outflows for both Equity and High Yield.
Investment Grade spreads closing marginally wider on the week, dragged down by deteriorating equity and high yield markets, and ongoing supply in the US. On balance higher rated corporate bonds remain well bid, with institutional investors reported to be increasing their holdings in recent weeks. New deals continue to be well received, with quality name deals performing on the break. In Canada, a lack of supply has kept spreads near recent tights, though we anticipate more new issue activity in the second half of the month.
Credit markets continued to trade with a positive tone throughout the week despite equities fading after Tuesday. A
solid employment report on Friday has pushed the likelihood of a December Fed hike up to 70% according to futures
markets, with many pundits suggesting it’s now a virtual certainty. US 5y yields have moved up 45bp in the past 3
weeks driving Treasury prices down 2%. Corporate new issue supply was solid in the US with 43Bn priced.
Halliburton’s jumbo deal (A2/A) was long anticipated and well received despite pricing 35bp through initial
guidance, reflecting strong demand for investment grade bonds. Canada supply continues to be very light, suggesting
the technical rally could continue into next week.