At Issue
If credit investors are supposedly smarter than their equity counterparts, then credit issuers must be the smartest of all. It’s a seller’s market: If you bring it to market, they will buy.
Junk issuance, slow to start the year and dry in December, is back with a vengeance. Bloomberg’s Gowri Gurumurthy notes that Tuesday was the busiest day for sales since August. Of the four issues that came to market, all got orders at least five times the size of the initial offering –on a day when the S&P 500 index of stocks fell 1.4 percent, no less!
There’s been more since then. For instance, Transocean sold half a billion to help fund its offshore drilling rig; Altice also tapped the markets for $1.5 billionto refinance its debt load.
There’s still some signs of lingering caution in high yield, to be sure. Bespoke Investment Group notes elevated skew in options on the HYG ETF – that is, puts trading at a substantial premium to similar-moneyed calls. Some of this pick-up in protection may be attributable to leveraged loan investors who lack a liquid options market and are opting to hedge their exposure in an asset class that’s a cousin of sorts, according to JPMorgan.
Credit investors are bullish again. They especially like BBBs – the riskiest of investment grade – and early in 2019, these dogs of the high-grade debt market are now its darlings.
Investors like investment grade bonds so much that dealers no longer have any.
“Estimates based on TRACE show that high grade dealer inventory levels have reached some of the lowest levels since at least 2015, or close to zero,” writes strategist Yuri Seliger, who highlighted robust buying by foreigners. “Thus, the strong demand coupled with limited supply should continue to be supportive of spreads.”
U.S. investment grade bond indexes are back at levels not seen since before volatility exploded about one year ago. Stocks haven’t even recovered their December losses.
American credit is the best example of renewed risk appetite, but it’s far from the only one. Emerging-market governments – led by Saudi Arabia – raised a larger-than-expected $19 billion in the first three weeks of the year.
Spain received record orders in its 10-year sale, demand for Italian and Portuguese bonds has been unprecedented, to boot.
(We’d be remiss not to note a rare exception: Denmark’s awful initial sale of 10-year debt.)
But even that exception almost proves the rule: Denmark’s debt was AAA and yielded almost nothing, the immense appetite for everything else shows the extent to which the reach for yield is back after a brief hiatus. Scarcity, in the low-inflation environment that dominates across developed nations, is much more a feature of financial assets with a decent yield than it is in the real economy.
Carried Away
During a twelve-month period in which American economic exceptionalism and a trade war have been the top macro themes, U.S. dollar-denominated developing market debt has outperformed U.S. domestic-oriented equity by a substantial margin.
It’s little surprise that carry trades are very much back in vogue.
The Federal Reserve is now in “patience” mode. The European Central Bank has warned that risks are tilted to the downside, and the IMF’s negatively revised growth outlook is mostly attributable to cuts on that continent.
Relatively solid U.S. data and the leveraged yen seller blowup in early January – as well as the tendency for these currencies to hold up well during risk-off episodes – are making the choice of funding currency among the three majors a little easier. The bigger question for investors may be where to seek carry.
Looking at two different emerging market carry baskets – Asia and Latin America – is instructive in this regard.
The former looks penalized due to its members’ economic link to China and net oil importing status. To this end, the ruble – a petrocurrency in neither of these indexes – tops the carry leaderboard so far this year. That leaves LatAm – which has more idiosyncratic structural reform stories in Brazil and Mexico, fairly appealing real rates, and oil exposure – carrying the day for now.
Bond Vigilantes
If Venezuela had real elections and voting rights extended to its creditors, it’s pretty clear who they’d throw their support behind.
The nation’s 2027 and state-owned oil firm’s 2026 bonds have been rallying sharply in recent days amid investor optimism that a political upheaval is at hand.
President Nicolas Maduro retains the backing of the military, but has lost the support of the international community. U.S. Vice President Mike Pence called Maduro a “dictator with no legitimate claim to power” on Tuesday. Juan Guaido, president of the national assembly, has declared himself the head of state. That proclamation has been formally endorsed by President Donald Trump, as well as Canada, Argentina, Brazil, Colombia, and Panama.
Guaido has said he will seek debt renegotiation and relief. Potential regime change, for investors, means the ability to come to an accord with a new administration as sanctions hamstrung their ability to do so with Maduro.
Talk Is Cheap
The Fed may be in a blackout period, but the Trump administration’s penchant for discussing the U.S. central bank takes no such breaks. By now, we have numerous examples of critical comments from Trump on the Fed in general and Jerome Powell in particular.
The latest edition: NEC director Larry Kudlow said that Trump wants like-minded people to fill out the two vacancies on the Board of Governors. The president is a self-described “low interest rate guy.”
There’s uncertainty as to whether the inflation hawk Marvin Goodfriend will be re-nominated.
It’s a testament to the perceived stability of this American institution that these remarks have never made waves in the bond market. According to central banking pro-independence lore, criticism of monetary policy tightening by public officials generates higher risk premiums in financial markets.
Loose talk from the president and his advisers about the central bank haven’t jolted term premia or longer-term measures of inflation compensation. In fact, the 10-year term premium is near all-time lows. Action’s a completely different story, but the U.S. experience is that talk of this nature is cheap.
(Loose talk from the Fed Chair in October about “long way” from neutral, however, did).
Potpourri
Davos elite bash Fed, buy duration.
How Chinese companies are trying to trick the credit market.
Give the BOJ a break.
Too little, too late for PG&E?
Another politician’s verbal gaffe rattles the bond market.
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