Global credit finally enjoyed a bounce in sentiment as easing global trade tensions and Teresa May’s survival as UK Prime Minister outweighed evidence of a slowing Chinese economy. Despite the improved tone, corporate issuers remain on the sidelines with only a couple of new deals launched last week. Issuance should now remain light for the rest of the year which should support the technical tone for credit. The US Federal Reserve meets on Wednesday for the final time this year, and investors will focus on any statements regarding the path of interest rates in 2019. Recent inflation and employment data suggest additional rate hikes are justified, but President Trump continues to pressure the Fed to hold rates steady. Futures prices currently suggest 1-2 hikes expected in 2019.
Canadian credit lagged the global rally, with higher beta sectors like NVCC and REITs trading up to 5 bp tighter on very low volume. No new issue activity to drive trading, and overall there was a sense of consolidation at these wider spreads. Credit will continue to take its cue from stocks but the overt selling pressure we saw recently would appear to have subsided for the time being.
The downturn in global credit continued into an eighth week as negative headlines and a lack of buying interest persist toward year-end. After what appeared to be a successful G20 summit, optimism faded throughout the week as both US and Chinese governments could not deliver consistent messaging, while the arrest of Huawei’s CFO in Vancouver appeared to ratchet up tensions at a critical time. The inversion of the US treasury curve between 2 and 5 years reflected investor concerns about a slowing economy in the face of projected rate hikes, and a disappointing jobs report on Friday pushed the 10y treasury yield to its lowest point since August.
Canadian credit was generally wider last week as well. There was good news for the energy sector in the form of production cuts from OPEC+ and the government of Alberta, however an inaugural deal for AltaGas Canada received only lukewarm response and was unable to hold new issue spread in secondary trading. Despite a strong Canadian jobs report on Friday, interest rates still finished the week significantly lower with 10-year Canada yields back to unchanged in 2018. Traders are now pricing in a slower path to normalization with only 1-2 rate hikes expected in 2019.
Despite a positive week for global equities, credit markets remained firmly on the back foot. Supply was a significant factor, as issuers took advantage of lower market volatility to shift a pipeline of deals which had been waiting in the wings. 28 issuers brought deals to the US market last week for a combined total of $34 Billion. Spread concessions remain elevated, but deals struggled to perform and generally pushed secondary spreads wider. The US yield curve shifted lower after Fed Chairman Powell appeared to suggest the pace of rate hikes may start to slow. Global risk assets are opening up better this morning as the US and China appeared to declare a truce in their trade war, and US bond markets will close on Wednesday to mark the national day of mourning for George H.W. Bush.
Canadian spreads also widened last week to cap a difficult November for domestic credit. According to Merrill Lynch data, November was the worst single month for Canadian credit markets since 2011, as global equity volatility and falling oil prices contributed to investor unease. Despite the negative tone, Loblaw’s Inc was able to return to the primary market for the first time in 5 years. The deal performed well, but the remainder of the BBB space repriced 5-25 bp wider.
US Thanksgiving meant fewer new issues and lower trade volume generally for global credit markets last week. The risk-off tone continues with November shaping up to rival February as one of the most volatile months of the year. Brexit headlines, lower oil prices and weak tech sector earnings all created a difficult backdrop, and ETF outflows reflected investor unwillingness to bet against the recent trends. Industrial and Utilities sectors outperformed as investors moved into higher quality paper while Autos continue to widen, trading 10-40 bp wider on the back of internal control concerns at Nissan. Liquidity is expected to improve this week and new issue markets will be making up for lost time as we face a busy couple of weeks before things start to wind down for the holidays.
Canadian credit spreads also remain on the back foot and liquidity was poor as dealers struggled to find homes for bonds. The continued collapse in crude prices weighed heavily on the energy sector as concerns over oil supply and the discount of Canadian Select pushed out spreads by 10-15 bp. Despite the soft tone, two Canadian issuers squeaked into the primary market this week, Canadian Utilities and Vancouver Airport, both printing 30y deals now trading around ‘new issue.’
US and European credit spreads widened to a two year high even as other risk assets showed signs of stabilization this week. US credit spreads were generally 10-15 bp wider across most sectors as investors continue to focus on selectively poor earnings, idiosyncratic credit risks (General Electric, Pacific Gas & Electric) as well as European political volatility. UK banks led European spreads wider following a spate of cabinet resignations over a potential Brexit compromise deal. US Thanksgiving is expected to make for a quieter week, and continued stock market stability should allow credit spreads to settle.
Canadian credit also experienced some significant widening due to the generally weak market tone. Maple Financials, Autos and Energy sectors were hit the hardest, widening by 10-20 bp on the week. The primary market was very quiet this week as potential issuers try to wait out the volatility. EPCOR Utilities was the only issue of note, printing a $200mm 30yr bonds at a spread of +145 bp, finishing the week 3 bp wider. Any new issue activity is expected to come Monday or Tuesday before markets quiet considerably in the back end of the week.
US midterm elections passed largely as expected last week, allowing risk markets to advance as political uncertainty faded. However slower Chinese economic data and weak oil prices left markets on the back foot and credit spreads wider by week’s end. On Thursday the Fed left the overnight lending rates unchanged, but appeared to shrug off recent soft economic data by implying further hikes remain likely. The Treasury curve flattened on the comments with the 30-year yield 6 bp lower. Oil finished the week below $60 a barrel for the first time since February as the US continues to ramp up production.
Closer to home, earnings continued to take investors’ attention with a focus on the Real Estate and Life Insurance sectors. The primary market was decently busy with three deals coming to market. Australian toll-road operator Transurban was an issuer of note, printing a 10-year maple issue following a week of roadshows. The bonds finished 9 bp tighter for the week and sparked some selling of infrastructure paper including bonds issued by 407 Highway. Spreads of beleaguered conglomerate General Electric continue to widen in all markets, with the C$ 2022 bonds 50bp wider on the week.
S midterm elections passed largely as expected last week, allowing risk markets to advance as political uncertainty faded. However slower Chinese economic data and weak oil prices left markets on the back foot and credit spreads wider by week’s end. On Thursday the Fed left the overnight lending rates unchanged, but appeared to shrug off recent soft economic data by implying further hikes remain likely. The Treasury curve flattened on the comments with the 30-year yield 6 bp lower. Oil finished the week below $60 a barrel for the first time since February as the US continues to ramp up production.
Global credit remained on the back foot last week as the fallout from global equity volatility continues to play out. Decent US bank earnings were not enough to overcome concerns regarding interest rate policy, trade disputes and Italian deficit projections. The Automotive sector was hard hit as weak retail sales data, and a downward guidance revision from Daimler pushed out spreads in the sector by 7-15 bp. Corporate debt issuance remains light as volatility kept borrowers on the sidelines. Conagra ($CAG) was a notable exception, printing a US$6.5 billion deal across seven tranches to fund its recent acquisition of Pinnacle Foods. While the shorter 3-5 year tranches performed well, the 20-30 year maturities finished the week wider, resulting in a curve steepening of 11 bp from launch spread.
Canadian credit was mostly subdued thanks to decent earnings and a strong primary market. Industrial and energy sectors underperformed, widening 2-5 bp, while higher-rated Project Finance and Infrastructure sectors held in. The Canadian primary market was active with five issuers printing a total of C$2.1 billion throughout the week. For the most part, deals were well received by investors with Brookfield and Crombie REIT in particular tightening by up to 10 basis points on the break. Looking ahead, investors will be turning their attention to a busy week of earnings reports and an expected interest rate hike by the Bank of Canada on Wednesday.
Global credit widened in sympathy with the sharp selloff in equities, but the overall tone remained stable with little signs of panic for corporate debt. Supply was limited as many firms are in issuance blackout due to quarterly earnings reports. Autos suffered a difficult week with Ford and GM 15-25bp wider after reporting a slowdown in Asian sales. Most spreads were 5-10 wider for the week and may take time to recover with the VIX volatility index finishing the week above 20 for the first time since April. The fall in stocks brought a halt to the selloff in government bonds, but yields remain elevated for the month, and the rate curve has steepened. US banks began to report earnings which have come through generally strong and helped to finish the week with a more balanced tone – expect issuance to pick up this week if markets hold.
In Canada, credit was active on the global sell-off in risk assets. During the risk-off tone, high beta credits underperformed with NVCC, Retail and TMT sectors all widening by 2-5 bp. Utilities and Infrastructure provided a haven, finishing the week relatively flat. The lack of any issuance in the Canadian market during October has created a technical bid for paper, keeping secondary credit spreads orderly. The last issuance in Canada was the RBC bail-in bond on September 24th.
The rise in sovereign bond yields around the world to multi-year highs was the main story last week, with US Treasury yields leading the way on the back of positive NAFTA news, record high oil prices, strong economic data and hawkish Fed-speak. Most major bond indices, including Canada, are now in negative territory for the year. Credit spreads held in well, helped in part by a successful jumbo deal for Comcast to fund its acquisition of Sky Media. Friday’s US employment data for September came in below expectations, but accelerating wage growth and upward revisions to prior month’s data were enough to cement the rates sell-off. Energy sector bonds finished 2 to 7 bp better on the back of oil prices rising to multi-year highs.
Canadian credit markets welcomed the announcement of a US-Canada trade deal on Monday, moving spreads broadly tighter. However the euphoria felt short-lived, and attention soon returned to rising interest rates and other global factors. Canadian bank deposit note spreads traded tighter through the week as investors hoard these legacy bonds which are structurally superior to new bail-in bonds. Although there have been no domestic deals to follow on from Royal’s inaugural bail-in bond launched in September, Royal did tap the US market with a 5-year note as it tries to establish a clearing price for this new type of debt. BMO was also in the US market last week with a callable 10-year subordinated deal which looked tight and struggled to hold new issue spread. The lack of performance in the US deal caused domestic sub-debt spreads to widen modestly.
North American credit markets finished the month on a positive note while Europe staged a modest retreat. The US Federal Reserve hiked rates for the third time in 2018 and signalled another could follow before year-end. Bond yields in both Canada and the US finished September near multi-year highs as bond traders anticipated a resolution to intense trade talks. European markets were weaker as the Italian coalition government seems intent on running a greater budget deficit than European guidelines. Italian sovereign spreads traded 25bp wider on the week.
Trade talks aside, the main news in Canadian credit markets was the long-awaited launch of the first bail-in bond by a Canadian bank. On Monday RBC brought a $2 billion 5-year note approximately 13 basis points behind its existing deposit note paper. The deal was priced at the tight end of expectations and found solid demand but struggled to tighten much inside of launch spread by Friday. Elsewhere Enercare spreads were substantially wider after being placed on watch for downgrade by both DBRS and S&P. The announcement of a trade deal overnight has given Canadian and US markets a buoyant tone to start the week.
Global credit extended the tightening streak as optimism over the global economy, clarity in tariff implications and stabilization in EM assets have all helped to buoy global credit. Trade war fears were largely shrugged off in the corporate credit space as China’s retaliation to Trump’s new tariffs were less than expected. The investment grade market was well bid as increases in rates and solid tone generated strong demand for high-quality and longer duration bonds.
Canadian credit continues to tread water with the exception of Financials as the era of the deposit note comes to an end. The Canadian corporate bond market is entering uncharted territory this week as the bail-in regime begins, replacing deposit notes with equity-linked bail-in bonds. The scarcity of deposit notes and ongoing argument of spread basis has created technical demand for secondary financial paper, tightening 2-5 bp for the week.
Global credit spreads posted a strong week as emerging market tensions eased and US economic data suggested inflation remains in check. US 10-year government yields rose back toward 3%, which created demand for spread assets. Most sectors traded tighter with European banks and Energy leading the way.
The tone was more balanced in Canada with credit spreads finishing the week broadly unchanged. Higher beta sectors such as Consumer Retail bonds and Real Estate contributed to the underperformance. The Canadian primary market saw just over $3 billion of supply this week including an innovative “Women in Leadership” deposit note for CIBC designed to fund lending to corporations promoting gender equality.
Global credit spreads traded within a tight range throughout the holiday shortened week as a resurgence of primary supply was the main story. Over $55bn of new corporate deals priced in the US alone, led by a successful $19 billion issue by Healthcare giant Cigna Corp to fund their acquisition of Express Scripts. Most deals were able to price well and find willing buyers after an August that was starved for supply. European spreads had a mixed week as headlines out of Turkey continued to exert pressure, while Italian spreads rallied on improved political rhetoric. The US Treasury curve flattened and short-end yields rose after a strong payrolls report showed hourly earnings had risen 2.9% over the past year – the most since 2009.
Canadian Corporate spreads edged wider as the market digested financial issuance from TD and Caisse Desjardins. The Bank of Canada kept rates steady but cautioned further hikes were still warranted. Government yields rose off 1-month lows while the Canadian dollar finished the week softer as trade talks in Washington struggled to make meaningful progress.
Global credit spreads edged modestly wider on low volume to finish the last week of summer, as ongoing NAFTA negotiations and developing currency issues in Argentina and Turkey contributed to a risk-off tone. Higher beta names, particularly industrials, were hardest hit going into month-end as hopes of a trilateral NAFTA deal did not come to fruition, further pushing back the deadline. As a result of the weak tone, the US dollar and Treasuries posted gains for the week. The new issue market was virtually non-existent with just under $5bn of new issues leading up to the long weekend. The first week of September is expected to be busy as vacationers return from summer holidays with a full slate of economic data and guidance from a number of Fed officials.
Canadian credit finished the week relatively flat as NAFTA negotiations with the US, the Trans Mountain ruling by the Federal Court of Appeal and GDP numbers dominated headlines. Canada’s economy posted a second strong quarter with GDP expanding 2.9% in Q2 of 2018. The print was below the 3.1% expected by consensus but close to the Bank of Canada’s estimate of 2.8%. Given the results, the 5yr government bond fell by 5 bp while pushing back expectations of a rate hike to December. The Canadian primary market was also slow with heavy funding from the domestic banks outside of the C$ market. BMO was the only notable issuer, printing $1.25bn of a 10y deposit note with little concession.
Global credit leaked wider throughout the week while U.S. equities closed at all-time highs as investors largely shrugged off US-China trade talks, President Trump’s legal troubles and fresh Russian sanctions. Markets stabilized on Friday after Fed Chair Jerome Powell reiterated a gradual hiking cycle in his first Jackson Hole speech. Post Powell’s comments, expectations of a September rate hike have now increased to 95% while rates were unchanged. China and the U.S both implemented tariffs on $16bn of each-other’s imports, as two days of talks between the two nations ended without any resolution. The primary market was relatively quiet last week as eleven borrowers combined to print $10bn of new supply. This week, issuance is expected to slow down completely as we enter the last week of summer with $5bn of supply expected.
Canadian credit outperformed its global counterparts as oil prices improved and the expected issuance from the big Canadian banks post-earnings did not materialize, creating a technical demand for paper. Investors were greeted with a couple other issues including two corporate deals from Heathrow Airport and Honda. Heathrow Airport came with an expected 12yr tranche, printing 400mm with a slight concession to secondaries at +148, finishing the week at new issue spread.
Global credit stabilized as Turkish leaders sought to reassure investors of their path toward solving Turkey’s economic issues while the announcement of trade talks between the US and China later in the week led to a strong finish. Despite the encouraging headlines, European banks traded heavily, pulling down the broader European Index. Oil also continued to trade downward after Wednesday’s inventory report showed a surplus of inventories. Issuance continued at a decent clip, printing close to $30bn worth of paper before the primary market is expected to dry up as Labour Day nears and as central bankers meet in Jackson Hole this week.
Canadian credit largely followed suit as we enter the final weeks of summer. The overall tone was mixed but positive as investors expect strong inflation data and renewed mortgage growth to be reflected in bank earnings reports this week. Canadian inflation numbers for July surprised to the upside at 3% due to increases in gas and airfare prices, though core CPI was largely in line. The results further solidify expectations for at least one more rate hike in 2018. Bell Canada launched the only domestic issuance of note, printing $1 billion of 10-year paper with a modest concession.
Global credit took a sudden turn wider this week due to a jump in global issuance and economic concerns out of Turkey. The recent weakness of the Turkish Lira (TRY) came into investor’s focus after Trump’s tweet about the doubling of tariffs on Turkish steel and aluminum, enabling the TRY to fall to record lows. Adding to the volatility, the ECB reported its concern over the Eurozone’s major lenders exposure to Turkey. European Financials were hit the hardest on the news with Spain’s BBVA, Italy’s UniCredit, and France’s BNP all trading 15-25 bp wider on the week. With fears of a spillover from Turkey, investors sought refuge in US and German government bonds. Last’s weeks primary supply of $37.6bn surprisingly exceeded expectations of $20bn and did not improve investor’s tone. New issuance was highlighted by deals from BNP and Lloyds, both managing to issue before headlines out of Turkey took over.
Canadian credit was relatively quiet, largely dodging the credit widening due to Turkish headlines. New issuance roared back to life after a very quiet summer with $2.75bn printed through three issuers. AT&T ($T) got things started with a two-tranche maple issuance consisting of 7yr and 30yr notes. Both tranches performed well on the break but leaked wider to finish the week at new-issue spreads.
Global credit inched tighter last week amidst a backdrop of corporate earnings and macro news including rate decisions from the Fed, the Bank of England and Bank of Japan. US credit traded 5 bp tighter week over week as generally positive earnings flowed in, highlighted by the strong beat by Apple. Energy, Telecom, Life Insurance, and Bank sectors continue to lead the move, averaging 20 bp tighter over the last month. US interest rates were steady on the week as The Federal Reserve opted to leave rates unchanged but emphasized strong performance in the economy. The combination of strong Fed guidance and decent jobs numbers on Friday left the door open for two more rate hikes in 2018. Conversely, the Bank of Japan provided a dovish tone, signalling that they will maintain their easing measures and keep rates low for the foreseeable future.
Canadian credit moderately outperformed on the week, attributable to strong earnings, very light dealer inventories and robust economic data. Canadian GDP for May beat expectations at +2.6% year over year, allowing Canadian rates to rise while providing confidence to investors. The lack of recent issuance has created a noticeable bid in secondary domestic markets, particularly for longer-dated paper and deposit notes.
Global credit markets continued the summer rally as investors digested mixed earnings amid a macro backdrop of strong economic data and easing trade tensions. Sectors including Energy, Industrials and Financials rallied while Consumer Discretionary and Tech underperformed. The FAANGs were the laggards of the week as Facebook set the tone with a sharp selloff amid headwinds from platform changes and increased costs related to the privacy scandal earlier in the year. On the macro front, Investors were encouraged by the U.S second quarter GDP data, growing at its fastest pace since 2014 at 4.1%. European credit also contributed to the rally as the ECB reiterated its plan to end bond purchases and keep interest rates unchanged through the summer of 2019, citing a dovish tone.
Canadian credit held firm on the back of easing trade tensions and robust earnings. Almost all Canadian IG sectors experienced spread tightening, although significantly lagging their global counterparts. Sectors like Deposit Notes, Pipelines and REITs performed well, mostly attributed to outperformance in the long end of the curve. The primary market remains quiet as we enter the summer months with $1bn of new supply from two issuers, Power Corp and CN Rail.
Global credit traded within a tight range throughout the week as record earnings evened out the negative implications of further trade wars. President Trump warned that he was ready to impose tariffs on the full $500bn in Chinese imports after already enacting tariffs on $34bn of goods from China this month. The EU also entered the mix, warning that it would introduce retaliatory tariffs in response to Trump’s proposed 20% auto import tariff. Money center banks including JPMorgan, Citigroup and Bank of America were busy in the primary market post-earnings. Outperformers were skewed toward front-end floating bonds.
Canadian credit lagged US credit as trade tensions, headwinds in commodities, and raising rates kept investors at bay. Canadian banks were the highlight of the week with an upgrade by Moody’s due to an expected methodology change, resulting in the deposit notes of Scotiabank, BMO, CIBC and National Bank upgrading to the AA index bucket, repricing the sector 2 bp tighter by weekend. Encouraging inflation data on Friday increased the odds of another rate hike, enabling rate-reset preferreds to rally along with government yields while credit faltered. The Canadian primary market was relatively quiet with $1.5bn of supply as most issuers remain in blackout periods.
Global credit rallied throughout the week as the prospect of trade talks between the U.S. and China helped settle nerves while President Trump reaffirmed the U.S. commitment to NATO. Commodities, especially base metals and soybeans, were under pressure due to worries of decreasing demand from China given indications of slowing growth and effects of tariffs. Investors started to brush off trade concerns in credit markets later in the week, focusing instead on what is expected to be a strong quarterly earnings season. By the end of next week, 20% of the S&P 500 will have reported, skewed towards financials and industrials.
Canadian credit traded flat on the week due to a combination of trade concerns, a tightly priced new issue market and the anticipated rate hike by the Bank of Canada (BoC). Investors awaited the BoC’s 25bp rate hike on Wednesday, raising the overnight rate to its highest level in almost 10 years while government yields finished flat on the week as most of the hike was already baked in. The new issue market roared back to life early in the week with just over $2.5bn spread across Industrials and Financials, focused in the 5-year tenor. Most new issues launched with little concession but still encountered heavy demand for bonds.
Bond trading volumes were light in a holiday shortened week, with virtually no new corporate issuance in North America for the first time this year. Credit markets welcomed the break and index levels recovered somewhat from recent woes despite escalation of trade war tariffs and rhetoric. President Trump imposed tariffs on $34bn of Chinese imports, a move which was quickly reciprocated by China, and Canadian retaliatory tariffs came into effect on July 1st. The lack of strong market reaction suggests trade risks are already priced in and would require further escalation to cause additional concern. Minutes of the June FOMC meeting released on Thursday revealed worries on trade and a flattening yield curve, while US payroll numbers on Friday showed better than expected gains without significant pressure on wages.
Canadian employment numbers on Friday posted better job gains than expected though most were in the part-time category. Lack of surprises in the employment report would appear to clear the way for a rate hike on Wednesday, with market indicators now pricing in an 87% chance of a 25bp hike. New issue markets are expected to re-open on Monday and we anticipate a busier week although volumes will remain seasonably light.
Canadian credit spreads were moderately wider on the week but still finished the first half of 2018 substantially outperforming global indices.
Global spreads opened wider to start the week following Trump’s announcement to explore new sanctions on close to $200bn in Chinese exports. European credit was also weaker due to uncertainty regarding German politics, as nationalists showed signs of discontent with Angela Merkel’s coalition and her immigration policy. Late on Friday, President Trump tweeted a warning that if trade barriers are not broken down soon, the US will place a 20% tariff on all EU cars coming into the US, placing a dampener on auto spreads.
Canadian credit spreads continued to outperform this week, driven in part by a hot new issue market. Most deals this week launched with minimal spread concessions and a strong subscription base. Canadian issuers printed a total $7.5bn of supply last week, making June the highest month of issuance so far this year. New deals were spread across a variety of sectors including Financial, Auto, Utilities
and Pipelines. Natural gas producer Keyera was a notable deal, printing a $400mm 10 year that priced at +177bp over the government curve and ended the week 7 basis points tighter.
Global credit continued to recover from the prior month’s weakness as investors sifted through competing headlines from central banks and trade rhetoric. On Wednesday, the FOMC raised the Federal Funds Rate by 25 bp to 2% and forecast two more rate hikes for 2018. These results were interpreted as hawkish relative to market expectations causing equities to fall while credit stayed firm post announcement. On Thursday attention shifted to the European Central Bank (ECB) where Draghi announced that the Bank’s asset purchase program would begin to slow in September through the end of this year. Draghi also emphasized the policy rate would remain unchanged at zero through at least the summer of 2019 which was interpreted as more dovish than market expectations. The Euro sold off after the meeting while European credit rallied.
Canadian credit followed suit this week with most sectors tightening on the back of generally receptive central bank tone while positive developments from the REIT space and strong primary markets kept investors happy. The Canadian market welcomed $1.9bn of supply this week with a return to the market from Canadian Tire and an inaugural green bond from the pension issuer CPPIB. The performance of the new issues given the small initial concession shows the underlying tone of Canadian credit is still alive and strong.
Global credit markets struggled to gain any traction as ongoing supply contributed to technical heaviness while Canadian credit continued to buck the softening trend that pervaded most global markets last week.
Ongoing political rumblings in Europe and trade wars capped off a challenging month for global credit. Market volatility took hold with a spike on Tuesday as markets in the US and UK came back from holidays while a strong US jobs report on Friday helped to restore confidence. Italian politics were in full focus as Giuseppe Conte resigned as designated Prime Minister after the Italian president refused to accept Conte’s candidate for finance minister. Credit spreads in most sectors pushed wider as a result with Yankee banks trading 10-30 bp wider and Italian banks trading up to 60-70 bp wider. The US 10-year Treasury rallied sharply as investors sought a flight to safety, touching a low of 2.76% on Tuesday before finishing the week at 2.9%. The week ended on a strong note as Trump confirmed a meeting with North Korean leaders in June while record employment numbers boosted optimism.
Geopolitical issues and trade/tariff headlines took centre-stage last week, putting a dampener on global credit. As earnings season comes to a close, investors turned their attention to the North Korean summit cancellation and political uncertainty in Italy and Spain. In Spain, a major centrist party announced it was ready to back a no-confidence motion against Prime Minister Rajoy, while worries continue in Italy about the actions of the newly created populist coalition government. Away from politics, economic data in Europe were grim. The Eurozone Composite PMI index sank in May to an 18-month low. European credit spreads were trading generically 5-10 bp wider with Italian and Spanish banks leading the way. Italian sovereign debt continued to sell off with the Italy-Germany 10-year yield reaching its widest spread since 2014.
Canadian credit outperformed on a holiday-shortened week although tone still felt soft. Apart from the geopolitical backdrop, Canadian bank issuance and a drop in the price of oil took focus. After strong quarterly results, both CIBC and TD printed multi-billion-dollar deposit note deals. Although both deals were oversubscribed, the heavy supply and concession repriced the deposit note curve, widening spreads by 3-5 bp for the week.
Heavy supply amid rising interest rates gave credit markets a defensive tone last week. Hopes of a NAFTA deal were quickly deflated as the soft deadline of May 17th passed while representatives from all sides gave no indication of progress. The primary market in the US was active as borrowers combined to price almost $40 billion of new notes, led by the merger financing of Keurig-Dr. Pepper which included $8bn across six tranches. In Europe, Italy’s populist Five Star party joined forces with the anti-immigrant League party to claim a slim majority in the Italian parliament. Italian government yields rose 50bp and bank credit spreads widened amid fears of potential economic mismanagement.
North American interest rates were back in the headlines as Canadian 10-year yields rose sharply to reach 2.5% for the first time in four years. Although credit buyers ultimately prefer higher all-in yields, the downward momentum in prices is pushing some to the sidelines while they await stability. As a result, the Canadian corporate market was relatively dormant leading up to the long-weekend. Enbridge
spreads tightened materially as the company announced investor-friendly changes to its corporate structure. April CPI reported on Friday came in mostly as expected, cooling the rise in government yields and dampening expectations for a rate hike in May.
Global credit markets had an active and positive week as traders took political news in stride and cheered a benign inflation report from the U.S. on Thursday. President Trump confirmed that America would withdraw from the 2015 Iran nuclear deal, clearing the slate of geopolitical risks for the moment.
Canadian credit traded flat throughout the week as mixed earnings and a decent employment report kept investors on edge.
Global credit started May with a modest risk-off tone as bond investors continue to adjust to rising US government yields and look ahead to expected heavy new issuance in the next few weeks. The US Federal Reserve left interest rates unchanged on Wednesday while expressing confidence that inflation was trending towards their 2% target. Oil and trade remain in the spotlight with threats to the Iran nuclear deal pushing oil towards $70, and US-Chinese trade talks failing to find much common ground. On Friday it was reported that the U.S. economy added 164,000 jobs in April, which missed estimates but March numbers were revised higher. That was enough to send stocks higher and finish the week off on a more positive note.
The Canadian market remains a relative safe-haven, as a less hawkish central bank gives bond investors more confidence that interest rate expectations will remain more balanced.
Global credit markets were modestly softer last week, led by wider spreads in the US as 10-year Treasury yields finally breached the psychological 3% yield barrier last seen in 2013. The combination of rising yields, speculation of a “peak” in earnings and M&A activity placed pressure on US spreads even as North and South Korea signed a deal declaring a resolution to the seven-decade war.
Canadian Credit was able to maintain positive momentum due to constructive trade news and strong performance from new issues. The publication of the final Canadian bank bail-in and TLAC regulations as well as the Bank of Canada leaving the benchmark rate unchanged at 1.25% were both expected by investors but nonetheless supported a constructive tone in credit.
Despite a challenging few days for the White House and a heightening of tensions over Syria, bond traders focused instead on first-quarter earnings and a conciliatory tone from China to take credit markets higher for a second consecutive week. Chinese President Jinping calmed investors with a speech giving comfort that fears of a trade war were overblown. Focus then shifted to the first earnings season under the new tax reform, kicked off by Wells Fargo, JP Morgan and Citigroup. Investors are now expecting an average earnings boost of 5%. Inflation remains firm with March core CPI at 2.1% and Fed minutes showed further support for rate hikes, pushing 10-year Treasury yields higher to 2.83%.
Volatility returned to risk markets this week as conflicting statements from the White House regarding the likely impact of trade sanctions kept investors lurching from optimism to pessimism. The employment report on Friday showed that the US economy added only 103,000 jobs in March but markets focused primarily on wages, which were firm at +2.7% YoY. In a speech on Friday Federal Reserve Chair Powell took a hawkish stance, describing the economy as close to full employment and stating that a turbulent stock market was unlikely to change the Fed’s approach to monetary tightening. The yield on the 10-year Treasury rose 5bp for the week sending US and Canadian bond indices lower. Despite the cautious tone, credit markets were generally constructive with banks leading spreads moderately tighter.
Global credit markets remained choppy but finished the week on a positive note as fears of a global trade war eased. American credit was firm amid light volumes in a holiday-shortened week, largely underperforming the move higher in equities but still outperforming global credit for the week.
Trump’s threat of a trade war coupled with the FOMC meeting drove global equities and credit weaker for the week, causing investors to jump into safer assets such as gold and the Yen. The much-anticipated rate increase of 25 bp from Fed Powell’s first testimony was viewed as slightly dovish upon lower chances of a fourth rate hike in 2018.
Turn-over within the US federal administration coupled with an overhang of new supply contributed to a softer tone for US credit. Secretary of State Rex Tillerson was fired from his position on Monday citing policy differences with President Trump, setting the cautious tone for the week.
Despite a volatile week on the back of the resignation of White House Economic Advisor Gary Cohn, concern over tariffs and a strong jobs report, US credit markets finished broadly unchanged. Pharma giant CVS finally issued its long anticipated jumbo bond deal, the third largest IG deal in history at US$40 billion to fund its purchase of Aetna.
Threats by US President Trump to introduce tariffs on steel and aluminum, potentially sparking a global trade war, were enough to push credit and equity markets into the red last week, and sent US credit spreads close to a three-month wide.
A holiday-shortened week in the US and Canada contributed to a relatively narrow trading range for credit. Despite a more balanced tone and improving equity markets, credit continues to react to heightened volatility, ongoing supply and retail outflows.
It was a week of relative calm following tumultuous gyrations earlier in the month. Equity markets bounced, with US stocks moving back into positive territory for the year, while Canadian stocks struggle to catch up. Credit markets were more mixed, as investors and traders continue to rebalance portfolios in light of higher equity and rate volatility.
The global equity selloff dominated headlines throughout the week with one of the worst weeks for US stock indices since the financial crisis. Credit markets attempted vainly to shrug off the moves in equities, and it was not until late in the week where spread widening began to take hold. Flows were below average as trading dried up while the VIX hit multi-year highs not seen since 2015.
The relentless rise in global yields finally took the shine off stocks last week, which culminated on Friday with the worst single day loss for the Dow in almost two years. So far global credit spread reaction has been somewhat muted, with bond investors willing to view the selloff in stocks as overdue profit-taking after a near relentless four-month rally. Canadian credit was similarly spared although a new NVCC sub-debt bond for National Bank and a $2 billion 10-year deposit note for Scotiabank saw bank spreads trade heavy throughout the week.
Despite a negative week for Canadian stocks, domestic credit spreads continued to move tighter as higher interest rates and underwhelming supply created technical demand. US credit shrugged off a temporary government shutdown and a weaker dollar to finish another positive week. The fall in the US Dollar followed comments by the US Treasury Secretary and furthered by strong GDP numbers out of Europe as well as speculation the ECB would allow interest rates to rise more quickly than anticipated.
American credit spreads finally took pause last week after two months of near relentless tightening. A flurry of new issue supply from US banks was the main catalyst. Canadian credit ignored US headlines and continued to tighten as investors remain starved for new paper. What supply there was only served to re-price credit tighter, with a new issue by H&R REIT moving sector spreads 5-7bp for the week.
Credit markets shrugged off rising rates and NAFTA headlines to continue a strong start to 2018. Canadian credit lagged later in the week following news that the US is close to announcing its withdrawal from NAFTA. Despite the negative headlines, Canada’s first corporate issues of 2018 stormed to success.
The first trading days of the new year extended the positive momentum from 2017 as investors came back from the holidays with a slew of positive economic news out of Europe, North America and Asia. Canadian credit was also very well bid, driven by a lack of new supply, strong economic numbers and higher oil prices.