Investment grade credit markets were remarkably well behaved to start the new year, given the pain felt in most asset classes (North American stocks -5%, Oil -11%). Spreads widened modestly amidst good two way flow throughout the week. There is evidence of investors shifting from equities to bonds as ongoing uncertainty around China, commodity prices, and Fed Rate hikes weigh on market sentiment. New issue activity was robust, though limited to Tuesday and Friday when the markets were at their most calm. Canadian banks were active, launching covered bonds in Europe and a new domestic preferred deal from TD.
A second straight week of heavy selling in global equities led to a more severe widening of investment grade credit spreads, particularly on Friday. It continues to feel like credit is being dragged by equity and commodity markets, rather than acting as a leading indicator as it was in the second half of 2015. AB InBev completed the second largest ever bond transaction, raising $46 Billion through a multi-tranche USD deal launched on Wednesday. The deal attracted an all-time record $120 billion of orders and finished the week flat or marginally wider. Canadian banks continue to raise senior money in foreign markets, while focusing on NVCC issuance here in Canada. The TD NVCC preferred launched last week at 5.5% managed to trade up 1.2% despite the Canadian preferred index falling heavily to start the year.
Risk markets finally found some moderate stability in the third week of the year after reaching a low on Wednesday with global equities down as much as 12%. We finished the week with a decidedly more positive tone as Chinese stocks bounced and oil managed to close above $30. Investment Grade Credit markets continue to recoil from equity volatility and new issue activity remains well below normal for this time of year. The Bank of Canada’s decision on Wednesday to keep rates unchanged sent government bonds lower with a flatter rate curve. If Oil and China remain calm this week, attention in the US will turn to corporate earnings.
A disappointing week in Investment Grade Credit considering the strong bounce in equities to close the month. Credit was slow to sell off earlier in January, so not unreasonable that there is some catch up. While the US Federal Reserve may have disappointed the market on Wednesday by not stating that rate hikes were on pause, the Bank of Japan made up for it on Friday with a surprise rate cut to negative 0.1. Government bonds in the US and Europe rallied, while Canada bonds continued to under perform as the currency strengthens. Despite the bounce in oil prices, we saw energy sector bonds remain near recent lows. If the improved market tone holds, we expect increased bond issuance next week, which may account for some of the spread weakness heading into month end.
European banks were in the credit spotlight this week amid a backdrop of deteriorating risk sentiment overall. Deutsche Bank bonds traded at their widest level in nearly 4 years,after disappointing earnings and an expectation the bank will need to recapitalize itself. Fears of contagion in the banking sector sent spreads wider across Europe and the US. Energy bonds had a relatively stable week as oil prices held above $30. Despite a lack of market stability to start the year, investment grade issuance has remained on pace with 2015, whereas high yield issuance is down by 50%. With unemployment below 5% in the US and evidence of rising wage pressure, Janet Yellen will be treading a fine line this week to when she testifies to Congress and the Senate.
The week started off with very poor tone. European banks were particularly under pressure, with stocks down as much as 20%, and certain Contingent Convertible (“CoCo”) bonds falling 10% on the week. Credit spread widening was broad based across most sectors, and by Thursday was lining up as the worst week of the year so far, with liquidity becoming particularly challenged. There was some respite on Friday following Deutsche Bank’s announcement of a $5 Billion debt buyback, and a number of bank executives initiating significant personal stock purchases. There were no new issues in the US last week, highlighting how poor the tone was overall. Canadian credit continues to show more resilience, but remains under pressure on very low trade volumes.
Credit markets finally got some relief this week after a difficult start to 2016. European CoCo prices were up as much at 10%, though still remain 5-10% lower on the month, and most sectors were higher. The new issue market re-opened in force, with a number of deals launched in Canada and the US. Canada in particular had its busiest week of the year so far despite the Big 6 banks being currently in earnings blackout. Concessions are healthy, and notwithstanding the overall positive tone a number of names and sectors were under price pressure due to supply. If equity markets can hold we expect more supply and that credit spreads can grind modestly tighter to close out the month.
Global credit markets continued to recover last week with a strong week in US High Yield. Oil’s push above $30 led to some bottom picking in energy sector bonds, as recent ratings downgrades worked their way through the system. Despite the broad based strength, European banks continue to struggle, in particular UK banks as fears of a “BrExit” dominate the headlines. Canadian bank earnings were mixed, as a new preferred deal from RBC and bond deal from TD weighed on the sector. New issue supply continues to be heavy, with new issue concessions in the US shrinking from the prior week as most deals managed to perform.
Credit markets continued to rally strongly across all regions last week. BB and BBB names outperformed with oil prices rallying and government yields rising. A strong US employment report on Friday sent 10 year treasury yields back toward 1.90% from the mid-February lows of 1.65%. Over 50 Billion of new issues priced last week suggesting investment grade demand is deep, although the High Yield market remains virtually shut. While certain names and sectors have now fully recovered year-to-date losses, many remain underwater and aggregate credit spreads remain 10% wider than in December.
New money continues to pile into credit, but the three-week-old spread rally appeared to be running out of steam early in the week. All that changed on Thursday when the ECB unveiled a broader array of stimulus measures than the market was expecting. Perhaps most significantly was the expansion of the QE bond buying program to include investment-grade corporate debt. Details of what bonds the ECB will buy and in what size remain sketchy, but Thursday and Friday saw a sharp snap tighter in credit markets – primarily in Euro denominated debt but affecting developed market bonds worldwide. In fact, we see this as the single biggest weekly rally in credit since at least October. Interest rates continue to grind higher from the February lows and government bond yields in Canada are now close to unchanged year to date. Brazil’s first US dollar bond deal in 18 months, launched Thursday, is an indicator of the improvement in sentiment in the emerging market space. If oil holds above $35 we expect the ECB-fuelled credit rally can continue through next week.
After the ECB-led euphoria from the week before, last week was somewhat more balanced in terms of sentiment although we continue to grind tighter in credit. The US Federal Reserve offered a much more downbeat assessment of the US economy and suggested they will slow their pace of hikes over the next 2 years. The biggest reaction to that news came in currencies with the US Dollar falling over 1% against major currencies, which was enough to boost US stocks and bonds. Weekly fund flow data suggests cash is still pouring into investment-grade corporate bonds, and despite March Break and the street’s annual distraction of US college basketball, new issue activity remained brisk with over $30 billion priced in North America.
A hawkish tone from various Fed speakers, a stronger US$, and a weakness in oil all contributed to a pause in the ferocious credit rally that had been in place for the past 4 weeks. The new issue calendar was light (essentially non-existent in Canada), but the US$ deals that were launched were generally well over-subscribed and fills were very light. These deals tended to initially trade better but as the week went on there was less follow-on buying and deals drifted back towards original spreads.
The Canadian Federal Budget released on Tuesday was mostly in-line with market expectations. Some comments on “bail-in” securities has the market speculating that we may see these securities as early as mid-2017 – although we do not expect a material impact to existing deposit notes/NVCC securities until further clarification is released in the upcoming months. Notable credit strength in Canada this week was seen in recently issued bank preferreds along with other wide spread BBB names in the 3-5yr maturity bucket as accounts needed to put money to work and issuance has been light.
Coming out of the Easter long weekend, global risk markets were dominated by two events: a speech by Janet Yellen on Tuesday and the US employment report on Friday. We finished with credit mildly better and rates lower, although the tone was decidedly mixed by Friday. The market is seemingly baffled by opposing forces: a “dovish” Fed chair who seems content to move slowly on rates, and evidence of rising wage pressure which suggests inflation is moving higher and more rate action is warranted. We think the not-too-hot-not-too-cold scenario is a better one for credit than equities though with markets having moved a long way in 6 weeks we shall tread more cautiously in the short term.
From a technical point of view, investment-grade credit feels solid. New issue supply slowed considerably in the second half of March while IG and High Yield bonds funds saw decent inflows throughout the month. Most new issues this week performed well, and we saw consistent buying of credit into quarter-end. Next week sees us moving into earnings season, which should set the tone for risk markets in April.
With global stock markets enduring their worst week since mid-February there was a decidedly more cautious tone in global credit to start the month of April. The March FOMC minutes released on Wednesday revealed there was some debate around the pace of rate hikes in the US, and it’s clear not every Fed member shares Janet Yellen’s caution.
Technically credit remains strong with net inflows to both investment-grade and high-yield bond funds continuing into April, and overall credit markets had a modestly positive performance in what felt like a relatively quiet week. Share prices of European banks fell for the third week in a row, and we saw weakness spill over into Tier 1 debt by week’s end. At the other extreme the Canadian preferred market continues to recover well, with recent bank NVCC issues now up close to 6% to start the year.
Credit markets marched to fresh tights for the year last week, led by the energy sector as oil prices managed to hold above $40 for the first time since December. Credit was also helped technically by earnings season for the S&P 500, which means many firms are in blackout from bond issuance. New issue volumes were noticeably down from the previous week. European credit underperformed as concerns over the UK referendum continue, however, the week finished on a strong note with most European bank spreads finishing at recent tights.
US economic numbers were generally disappointing for the week, suggesting that yet again the US is unable to sustain the higher pace of growth we saw in the first quarter. However for the time being US markets appear willing to believe a “Goldilocks” scenario where the economy grows at a modest pace: warm enough to avoid recession but cold enough to stem the pace of any rate hikes. We would argue two things regarding this scenario; first that the market is susceptible to economic surprises in either direction which could quickly unsettle the equilibrium, and second that in periods of tepid growth credit markets should outperform equities. Either way, we feel more comfortable participating in the relative safety of the investment grade space than stocks or high yield bonds.
US bond investors appeared to have an almost insatiable appetite for credit this week, as spreads marched to a 9-month tight. Even as stocks and high yield faltered (somewhat) towards the end of the week in the face of mediocre earnings, investment grade markets continued to perform. Government yields are partly a catalyst, as the Canadian 10-year yield has now retraced all of its YTD gains. Credit spreads can tighten while benchmark yields are rising without reducing overall corporate yields.
The lack of a deal on oil supply out of Doha last weekend briefly pushed prices below $40, but the selloff was short-lived. It’s clear there were investors waiting in the wings to buy risk on any weakness. Energy sector bonds are generally finishing the week 20-40bp tighter. European Bank bonds also performed well this week as odds of a yes vote on the UK referendum were seen falling to around 30% (based on a consortium of UK bookmakers).
Central banks back in focus this week as both the US Federal Reserve and Bank of Japan hold meetings on rate policy. We expect US rates to remain unchanged but the statement will point to the potential for a June hike.
A more subdued week for international credit as earnings releases and central bank announcements kept corporate bond markets more on the sideline. As expected, the US Federal Reserve left interest rates unchanged on Wednesday, but tweaked the language on their press release to leave the door open for a hike at the next meeting in June. On Thursday the Bank of Japan surprised and disappointed the markets by not cutting rates, and we saw global equity markets trade lower into the weekend.
Canadian corporate bonds had a particularly good week fuelled in part by higher oil prices. Canadian markets had lagged the US for most of April, and played catch-up to finish the month. Government bonds sold lower as the yield on the 10-year benchmark rose 18bp this month – another factor which helped credit to rally. A new 5-year deal for international insurer Aviva launched on Wednesday was a blowout, and managed to tighten 35bp in two days. We still think the bond offers value at a 4.2% yield for 5 years on a Baa1 credit.
Overall the tone in credit remains strong, even as stock markets traded lower on the week. However, there are reasons to be cautious heading into May with stock markets showing signs of fatigue and new issue supply expected to increase.
May began with a reversal of March and April sentiment as equity and credit markets sold off amid falling oil prices and poor economic data out of Europe and the US. Global interest rates fell for the second straight week. US bond yields are back near recent lows as the market continues to discount the likelihood of additional rate hikes in 2016. However we did see the market shrug off a poor employment report in the US on Friday to finish modestly higher across most sectors, which may set the table for a better week ahead.
Sentiment in Canadian credit remained positive this week, as a lack of new issue supply and rotation out of equities maintained a supportive technical environment for corporate bonds. However the wildfire tragedy in Alberta has cast negative tone across the oil & gas and insurance sectors. Intact Financial Insurance spreads widened 15-20bp, while a number of investment grade energy names were out 20-30bp.
New issue activity in the US was brisk this week, and supply is expected to be high for the balance of the month. This will create trading opportunities in our strategies; even as it puts pressure on overall spread markets.
A pretty lethargic week for credit overall. Almost exactly three months after risk markets bottomed out in February, the rally is feeling tired. Stocks and bonds are trading with a limited amount of conviction, which normally precedes a change of direction. We are treading with caution.
Despite the lack of direction it was a busy week for corporate bond issuance. The US had one of its busiest weeks of the year with over $60 billion of new supply. As is typically in a late rally stage, the after-market performance of new issues was mixed, with issuers trying to squeeze out every last basis point of yield. A few underperforming deals are normally necessary to see concessions widen – it pays to be selective!
Lots of discussion around the longer term impact of ECB buying of European corporate debt, and overall that market was an underperformer this week. Issuers and investors are concerned that ECB buying will limit the amount of bonds trading in the market, which could suppress market liquidity and ultimately reduce the number of non-central bank buyers willing to participate. There is a risk that the purchase program has a negative effect on issuing spreads.
A mixed week for risk markets which was punctuated by the release of Fed minutes from the April meeting on Wednesday. Those minutes suggested the Fed was pre-disposed to a 25 basis point hike in June. That came as a shock to rates traders, who were pricing in only a 4% chance of a June hike. Treasury markets sold off sharply, with the 5-year yield rising by as much as 11bp in the hour after the release. Despite higher rates on the week, stocks managed to remain in positive territory. Credit was mixed, with indices wider overall even though bank spreads (outside of Canada) benefitted from expectations of higher rates. European Credit benefitted from polls suggesting the “Remain” side is gaining a small but significant lead in the Brexit vote. New issue activity continues to be robust, with the $20 billion deal for Dell generating over $80 billion of demand. After breaking up to 25bp tighter, the deal struggled to hold gains by week’s end.
The last full week of May was a strong one for global risk markets including credit. A number of factors combined to drive corporate bond spreads tighter in the US and Europe. The market grew more comfortable with the idea of a June or July rate hike in the US, but continues to presume interest rates will not move materially higher over the medium term. This gives corporate bond buyers appetite to add risk, and fund flow data suggests new money continues to move into investment grade credit even as other sectors see net outflows. More positive news out of Europe, as Greece was able to negotiate additional funds from Europe this week which should prevent a July default, and Brexit polls continue to point to Britain remaining in the EU. The one market that struggled to perform this week was Canadian credit, a technical result of outperforming global markets earlier in the month, increased new issue supply, and mixed bank earnings.
The supply calendar was heavy again this week, and May 2016 looks set to finish in the top 3 months of all-time in terms of US corporate bond issuance. We expect that supply to continue in June, which leads to increased secondary turnover and a profitable environment for bond traders. The US employment report next Friday, the Fed meeting on June 15th, and the Brexit vote on June 23rd will be the key directional catalysts for the coming month before we head into the slower summer period.
Canadian investors are turning their backs on traditional fixed income investments as a core component of their portfolios — should advisors be concerned? Let’s face it, with the Canadian 5-year government bond yielding just 0.8% or less than your annual management fee, the excitement generated from both advisor and client is negligible. And with Canadian core inflation currently averaging above 2%, investing in bonds virtually guarantees an erosion of your client’s capital.
The Wall Street Journal recently showed a chart comparing the forward earnings yield of the S&P 500 to that of the 10-year U.S. Treasury yield over the past 30 years. Around 2002-2003, the two yields were almost identical at 5%; today, the proxy yield for stocks is three times that of U.S. 10-year treasuries suggesting, at least by this valuation metric, that stocks are currently cheaper than bonds.
It’s precisely this argument that has financial advisors recommending a steady diet of dividend-paying stocks for all but their most risk-averse clients ignoring one of the most fundamental of asset allocation principles: a reasonable mix of stocks, bonds, and cash. Dividends, after all, tend to grow from year-to-year — think, the S&P 500 Dividend Aristocrats, those special companies who’ve increased ordinary dividends for at least the last 25 consecutive years, or the Canadian Dividend Aristocrats who’ve done so over the past five — protecting one’s capital from the ravages of inflation, while bonds don’t, instead paying a fixed rate of interest until maturity.
Just as risk markets seemed to be coming to terms with the idea of a summer rate hike, the US employment report on Friday threw a significant wrench in the works. The lowest gain in (seasonally adjusted) non-farm payroll figures since 2010 sent the dollar lower, treasuries higher, and left risk markets unsure what to do next. Are stock markets happy that rates may not go up anytime soon, or unhappy that US economic growth may be stalling? We’d make two observations which we think are pertinent, if inconclusive.
First, the seasonal adjustment in the May number is significant. On an adjusted basis the US added only 38 thousand jobs, but on an unadjusted basis there was an increase of 651 thousand jobs. This merely highlights the amount of noise in the process, and that investors do better to consider trends rather than rely too heavily on any one number. Our second observation is the market is quick to conclude that the Fed will not hike in June as a result of this employment report (Fed futures and options markets priced in only a 3% chance of a June hike post-number). It seems intuitively dangerous to say with certainty what conclusion a group of economists will arrive at in a closed-door session. That is not to say the Fed will hike, but the risks of a negative reaction to a surprise hike are suddenly looming large in a way they were not just a week ago.
Another schizophrenic week for risk markets as we head towards the FOMC rate decision on Wednesday and Brexit vote next week. Friday was the weakest day which reflects a lack of conviction heading into a weekend (when new opinion polls out of the UK might serve to alter the risk landscape). Interest rates globally reached extreme levels, with 10 year bund yields on the verge of going negative (Friday’s intraday low was 0.01%) and US treasuries reaching a 3-year low at 1.63%. Low rates would appear to be the norm for the time being; however experience tells us the lower we go the harder we will snap back when sentiment inevitably changes. As Bill Gross suggested on Thursday, “this is a supernova that will explode one day”.
Despite storm clouds on the fundamental side there are technical reasons to remain optimistic about credit in the near term. First, the supply calendar seems to be easing up after significant volumes of new issues in the past few weeks. Second, the ECB did commence buying of corporate bonds this week. European credit felt well bid and US credit was similarly supported. We believe there is a lot of cautious positioning around Brexit, and although there clearly remains risk to the downside if Britain votes to leave, there is also increasing potential for a “melt-up” in stocks, rates, and credit if Britain votes to stay.
The overwhelming driver of market tone last week was developments out of Britain ahead of Thursday’s EU referendum. Sentiment deteriorated throughout the week as the Exit side has been steadily gaining momentum, in a campaign that has become notably more mean-spirited and vitriolic. The fatal shooting on Thursday of pro-Remain MP Jo Cox may prove to be a turning point, as the conversation over the weekend seemed to swing sharply away from anger towards empathy. As we write markets are rallying on expectation of a remain victory. Despite the swing in betting odds we think the outcome is still too close to call, and an exit victory would be unequivocally bad for risk assets in the short term. However the world will not end and negotiations for Britain’s exit will be long and protracted. We will be watchful for buying opportunities on any precipitous fall in our markets.
The Federal Reserve meeting came and went last week without much fanfare. US Interest rates were left unchanged as expected, and we’ll do the whole thing again in July and September. Overall it was a fairly quiet week in credit, with no new issues in Canada and WestJet’s inaugural USD deal the only issuer of note in the US. Despite a lower week for oil Canada remains a relative safe haven for credit.
It goes without saying what the top story of the week was. Britain’s unexpected decision to exit Europe caught markets off guard and more than reversed what had been an otherwise positive week for global credit. It’s too soon to predict the long term ramifications – negotiations can’t even commence until Britain identifies a new leader after Cameron’s resignation – however we would remind investors that Investment Grade credit should prove a more robust strategy than most. UK banking, construction and travel industries were hit the hardest, but all sectors and regions were wider/lower on a tumultuous Friday, including North America. Trade volumes were muted, which suggests credit investors are content to watch and wait for more details. We do think that until we know who is favoured to be the British Prime Minister, what their plan is for renegotiating European trade agreements, and how Europe reacts to those proposals, we are in for a summer of ongoing market volatility. We intend to selectively add risk in this weakness, but will not be in an immediate rush.
Canada should prove a relative safe haven through the turmoil, though is not immune to a global selloff. The drop in oil back below $50, if sustained, will negatively impact what had been a productive first half of the year for Canadian credit. In rates news, futures markets are now pricing no US rate increases in 2016, and actually suggest a chance of a rate cut (recall in December the Fed predicted 4 rate hikes in 2016 – and we have yet to have even one). Not surprisingly, gold names like Barrick were higher/tighter for the week.
June ended on a positive note after a volatile month. While UK politicians begin a game of cat-and-mouse with the EU, central banks chose rhetoric over action, to good effect. Bank of England governor Mark Carney suggested a rate cut to come at some point this summer, while unnamed ECB sources described an expanded bond-buying program to counteract Brexit related volatility. With Britain clearly playing a longer term game rather than triggering Article 50 exit provisions immediately, the market decided there was no reason to panic just yet, and we saw a widespread short-covering rally. June finished lower overall, but with positive momentum, which continued on the Canada Day Friday in the US and Europe.
The other conclusion markets made from this week is that rates are headed lower. US treasuries finished their best month since January 2015; 30 year notes up 8% and yields falling to 2.28%. In terms of yield, treasuries are testing all-time lows, and a sustained break below 1.38% in 10y or 2.22% in 30 years will take us into uncharted territory. The prospect of lower yields for longer is clearly contributing to the equity rally, and as we saw both stocks and bonds rally this week, it is reasonable to expect that, at some point, the reverse will occur.
With major event risk out of the way and a July rate hike seemingly off the table, there does look to be some clear runway for a credit rally through the summer. However liquidity will inevitably be thin, and political headlines out of the US and UK will only increase. In Europe, recapitalization situations around Italian banks and Deutsche Bank will continue. We look to position ourselves constructively, but cautiously.
Despite a holiday shortened week with thin volumes, there were plenty of market moving events that impacted the credit markets over the past few days:
Credit markets were generally better this week, with much of the strength coming from non-European financials and mid-rated US & CAN corporates. In Europe, financials recovered much of the early week losses although they are still net down on the week. New issues were very active in the middle of the week, with many issuers aggressively looking to take advantage of lower all-in yields and a healthy market appetite for product.
Government yields globally reversed the course of the past few weeks and started to move higher last week, with 10 year rates up 15 basis points in Canada (to 1.10%), 24 basis points in the US (1.59%), and 19 basis points in Germany (0.00%). Equity markets saw new highs, and credit markets rallied accordingly as higher rates made all-in corporate bond yields more attractive. Q2 earnings season has started, with the initial results from financial benchmarks of JP Morgan, Citigroup, and Wells Fargo all showing modest improvements.
New issue markets were busy, and despite deals typically priced significantly tighter than initial guidance most saw decent follow-on buying. Month-to-date issuance volumes remain below expectations, suggesting we may experience higher levels of supply in back end of July.
Credit continued to perform this week as stocks rose moderately and government yields were broadly stable. European markets led the way, with bank spreads playing catch-up to the bounce in corporates. European bank spreads remain wider than pre-Brexit while corporate and US bank spreads have broadly recovered to year-to-date tights. Energy sector spreads lagged this week as oil continues to trade below $50.
New issue supply held steady, with US banks active this week following earnings releases. Canadian supply looks on pace for a July record. Secondary trade volumes have been robust, and higher than one would expect for late July. Overall tone continues to look good, despite some signs of rally fatigue by week’s end.
A modest pullback in global credit markets last week rounded out what nevertheless remained a positive month of July. The fall in oil prices back towards $40 weighed heavily on energy names; but credit spreads continue to remain tighter than when oil was last at $40 in April and we are cautious on the sector overall. US new issue market remained busy, however concessions have shrunk to virtually nothing which combined with the softer market tone meant after-market performance was limited for most deals. The Canadian new issue market was very quiet this week.
The US Federal Reserve unsurprisingly left rates on hold again in July. While the statement released on Wednesday left the door open for a September hike, market participants remain skeptical that we will see a rate hike in 2016. Government yields across the globe rallied last week, and as a result finished the month generically flat after selling off sharply mid-month.
Finally the results of European Bank stress tests were released late on Friday night. While there were some obvious (and expected) shortfalls, most notably Italian bank Monte di Paschi, overall the results were better than expected and should give markets some comfort that bank balance sheets continue to improve, even as earnings are weighed down by restructuring costs.
The defining story for the global bond market in 2014 was interest rates, but not in the way many predicted at thestart of the year. 2014 was meant to be about the end of Quantitative Easing in the US, and the shift from anaccommodative to a tightening bias by the Federal Reserve, with most analysts forecasting steeper yield curves and10 year rates to rise from 3% towards 4%. The Fed acted as expected but in the face of deteriorating global growth,lower inflation, and growing anticipation of a quantitative easing program in Europe, rate curves actuallyflattened and 10 year government yields in Canada and the US ended the year at 18 month lows near 2%.
August certainly began with a bang not a whimper as the US had its busiest issuance week since May, and fifth busiest week of 2016. Microsoft was largely responsible, successfully launching nearly $20 billion of new bonds on Monday August 1st while most Canadians were still sipping Corona’s at the cottage. Interestingly we found some better bargains to be had among this week’s crop, with the combination of heavy volume and softer tone (at least earlier in the week) led to healthier pricing concessions than we’ve seen in a while.
North American corporate bond markets continued to be unseasonably active last week with high levels of new issue activity in both Canada and the US. In terms of corporate bond issuance in the US, we look set to reach double the average volume for August of the past 3 years. Issuers are keen to take advantage of the lowest all-in yields of the year, and for the time being investors are welcoming with open arms. Pricing concessions have notably compressed, and it’s not unusual to see new bonds price at or inside secondary spreads.
As we enter the final weeks of summer, North American corporate bond markets quieted as new issue activity and secondary trade volume fell considerably from last week. The FOMC released the July Fed meeting minutes showing a degree of disagreement among committee members regarding the appropriate path of US interest rates. Investors read the minutes with a risk-on tone and we saw markets continue to rally, helped in part by the ongoing fall in the US dollar (which reversed somewhat on Friday).
Janet Yellen’s speech on Friday was seen as modestly hawkish as she highlighted the solid growth of the American economy and reiterated the Fed’s intention to further raise rates. Subsequent comments by Fed Vice-Chair Stanley Fischer left little doubt that a September hike remains on the table subject to economic data releases between now and then.
Typical for late summer it was a fairly subdued week in credit markets punctuated by the US employment report on Friday, which came in about 30k below expectations.
Are we on the verge of another Taper Tantrum? Stock and bond markets appeared to being contemplating that possibility as both sold off sharply Thursday and Friday following a status-quo pronouncement from the European Central Bank early Thursday.
Investment Grade Credit had its share of challenges this week with continued heavy issuance against a backdrop of falling equity and bond markets globally. For the most part credit volatility remains relatively low and trading is orderly compared to what is happening in other markets.
Central Banks were at the forefront of investor thoughts last week, with both the Bank of Japan and US Federal Reserve meeting to discuss rate policy.
European bank debt generally was wider last week in sympathy with Deutsche, while US credit was mixed and Canada continues to outperform.
In a week of falling bonds and stocks, credit was a notable outperformer with investors globally electing to sell government debt to buy corporate paper. The move in bond yields was precipitated by a report out of Europe that the ECB was considering plans to taper their bond-purchase program sometime in 2017.
Interest rates continue to be the main story, with 30-year treasury yields now 25bp higher over the past two weeks up to a four-month high as part of a broad-based selloff globally. Away from rates, it was a mixed week for risk markets overall, and for the most part investment grade credit spreads continue to outperform.
A positive week for most asset classes, with bonds and stocks finishing the week higher. Gains in credit were modest but extended a three-month trend of spread tightening.
Pre-occupation with a suddenly tightening Presidential race dictated market tone for the first week of November
Away from the equity rally which has caught most of the media attention last week, the big story around the unexpected Trump victory has been the sharp moves higher in global interest rates. This volatility represents some of the largest single day moves in the past five years, and in one week has unwound much of the bond gains of the year. Credit has been reasonably orderly, at least on a spread basis, and in fact, many sectors benefitted from higher all-in yields and anticipation of higher US growth.
Interest rates continue to push higher this week with the US 10 year yield rising another 15bp to a 12 month high. The TMX Canadian Bond Universe index has now given up over 50% of its year-to-date gains in just two weeks and highlights the benefit of diversifying your fixed income allocation away from rate-sensitive strategies.
A quiet week given the US Thanksgiving holiday on Thursday. Credit markets have diverged somewhat since the US election, with US feeling moderately better, Europe weaker, while Canada has enjoyed a particularly strong month. Interest rate markets were relatively subdued, and the calm was a welcome relief from what has been a difficult month for government bond traders.
Canada and US credit continues to perform well. However, sector and curve performance are mixed. Non-financials are leading the charge while US financials have been held back by increased supply. 10-year credit is notably underperforming while 30-year is performing well, as pension and insurance investors take advantage of higher all-in yields. Energy sector spreads were tighter this week following the OPEC decision on Wednesday to cut global oil production by 3.5% which sent crude prices back above $50/bbl.
The melt-up in stocks this week had a positive effect on credit markets as things begin to quiet down for the holiday break.
Despite delivering a heavily telegraphed 25bp rate hike on Wednesday, Fed governors still managed to surprise markets by pointing to a more aggressive path for rates in 2017. Treasury yields continued to move higher, with the yield on some securities now having doubled since the summer lows. Prices of ten-year Treasuries have fallen 8.5% in just 9 weeks and now look set to deliver the worst annual returns since 2013.
Credit spreads were relatively unchanged over the holidays as light trading volume and light issuance spurred little demand. Treasury yields moved slightly lower to end the year as investors took profits and moved to safe assets to start 2017. Investment grade credit, high yield, and preferred shares all finished the year with impressive returns.
Looking forward to 2017, American credit is in a good position to outperform on the back of a new president and strong economic data. In Europe, there are many potential developments early in 2017 that will challenge global bond spreads including the potential for the enactment of Article 50 and the fragile state of Italian Banks. Canada’s continuous disappointing low growth will also keep things interesting domestically while stable oil prices should be supportive for energy sector spreads.