Monday 21, February 2022

Credit markets drooping

If we are going into a bear market in equities, I’d expect to see credit markets weakening first. Bond traders are constitutionally bearish, and see the clouds on the horizon first, in my not-very-data-driven opinion. A graphic from the Daily Shot illustrates this for last week. It’s not uniform: emerging markets (EM) high yield, and EM sovereign debt did pretty well. Preferreds ($PFF) and HY corporates ($HYG) did OK, up around 0.3%. However, mortgage backed securities (including collateralized ones), as well as BCDs ($BIZD) and leveraged loans ($BKLN), all sagged.

What was interesting to me was how much investment grade corporate bonds ($LQD) suffered. They were down nearly 1%, which to me suggests some margin stress.

These are not big moves. All these are in some way correlated to the stock market. Maybe it’s just a contagion effect, with the variation accounted for by beta values.

Wrap

It looks like Putin politely waited for the Winter Olympics in Beijing to finish before taking over parts of Ukraine, including some (all?) of Luhansk and Donetsk. Russian equities took a dive, dragging down the STOXX 600. The USA rattled a few sabres.

Bonds strengthened, dragged up by US Treasuy futures. US markets were closed for a public holiday.

Some FOMC members (well, Bowman, anyway) said that a ‘hike’ was needed in March. Ukraine will be the perfect excuse for delay. I can’t see 50bp on the cards now.

Oil (near dated futures) shot up. Long dated futures drifted down. The market does not expect this to last.