🔔 Credit Markets Don't Know Either

In partnership with capital.comTrade 5,600 markets

  • 0% commission and tight spreads

  • Trade on market swings with CFDs & Spread Betting

  • Intuitive & easy-to-use interface

  • Smart risk management tools

  • Regular live updates & price alerts

78.91% of retail investor accounts lose money when trading spread bets and/or CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Credit markets are fun. They've shifted from "red light, iceberg right ahead" to 'signalling that the US will avoid recession' (even though the US is already in a recession, but not really)...

Two months ago this was happening 👇

BBG

MKW

Sounds scary, right? Fast forward six short weeks and... 👇

BBG

So what's going on? Some of the coverage claims that the pick up in risk sentiment has been driven by the July Fed meeting, but it turned way before that, back at the start of July.

This chart shows the Bank Of America High Yield Index Option Adjusted Spread.

Bit of a mouthful, but it shows that credit is becoming easier, not harder, even for the lower grade bonds (The ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade (rated BB or below)).

And for the big boys with their investment grade ratings, there's no real problem. Apple issued $5.5 billion of new debt recently "for general corporate purposes, including the financing of share buybacks and dividends" 👇

Apple Inc. tapped the US high-grade bond market Monday with a $5.5 billion sale in four parts.

The longest portion of the offering, a 40-year security, yields 118 basis points over US Treasuries, down from initial price discussions in the 150 basis points range, according to people familiar with the deal. The order book for the sale peaked at more than $23 billion, a person with knowledge of the demand said.

But the way I look at the credit markets is as a barometer for risk appetite. And the recent activity isn't really indicative of any major risk aversion.

There's two sides to every deal. The companies selling the debt, and the capital markets buying that debt. Both sides tell a story.

As benchmark interest rates have increased, yields on corporate debt increase too. Even if the spread remains stable, the repayment cost for the issuer is still higher. Neither party gets a say in this.

If the benchmark rate is 1% and doubles to 2% while the spread (or premium above the benchmark) remains stable at 1%, the issuer will still pay 3% instead of 2% on any new debt issued, even though spreads are unchanged.

If we look at 2020 & 2021, issuance was huge. This chart shows investment grade credit, but the trend was similar in lower grades too 👇

BBG

With rates at record lows and risk appetite through the roof, companies loaded up. So there's not that same pressing need in 2022 to go rushing back to the markets and take on debt at higher rates.

Some lower-rated companies are heading back into the markets and issuance has picked up after a barren July. 👇

In the US junk-bond market, two companies sold a total of $2 billion of bonds on Thursday, more than was sold in the entire month of July.

Both sales, from cable company Charter Communications Inc. and wealth manager Advisor Group Holdings Inc., found strong enough demand to increase the size of the offerings.

So, when we see charts like this... 👇

FT

It's worth asking how much of the low 2022 issuance is down to risk-averse investors, and how much is down to companies not being desperate for funding (due to the high 2021 issuance) and/or unwilling to pay higher rates.

To me, the recent improvement in credit markets is probably a temporary reprieve.

If the Fed wants to beat inflation, risk appetite and investment confidence needs to take a proper hit.

Given the absolute level of inflation (and potential stickiness of higher than 2% inflation due to companies being all too happy to pass price hikes on and workers negotiating higher wages), could it be that this relief is followed by wider spreads again?

Perhaps something like the early 2000's when spreads fluctuated but continued to widen across a four year period is a better analogue 👇

Whatever happens, the looming liquidity drain is the biggest risk for markets to navigate.

From September the Fed is set to up the QT pace to $95bn per month. Jackson Hole at the end of August should give some more colour on the Fed's plans and how prepared markets are.

Trade thousands of markets with Macrodesiac Partner capital.com 👇

Check out our reviews on TrustPilot 👇👇👇