Cracks worsening
August 31, 2022
–New low 5/30 treasury spread -5.5. Fives were +1.2 to 3.275 while thirties were down 2.6 bps to 3.22. Low so far this year -17 and low in 2006 was -8.3. Late price in CLV2 was 91.72, down 4.47 as the demand destruction campaign spills into energy markets. This morning CLV2 is 88.82. Low of the month has been 86.16 (settlement basis).
–A report yesterday that Taiwan fired warning shots at drones, allegedly from China, sent US stocks lower, with a faint end of day bounce. SPX finished -1.1%.
–Eurozone inflation new high at 9.1% in front of next week’s ECB meeting. DXY testing new highs, above 109 this morning with ECU2 printing exactly at parity.
–On the euro$ curve, new highs in EDU2 based spreads, with EDU2/U3 at a new recent high +53, up 6 on the day. EDZ2/EDZ3 was up 3 on the day, but is still -35, while SFRZ2/Z3 settled -25.
–FFV2 continues to tilt toward 75 at the Sept 21 FOMC with a settle at 9698.5, but a lot can happen in three weeks. QT is kicking into high gear in September and markets appear to be in a fragile state. Employment report on Friday.
Here’s an interesting clip from a BBG article yesterday citing Morgan Stanley:
“The canary in today’s credit coal mine could well be leveraged
loans, a less ‘macro’ but equally important part of the credit
market,” says Sankaran. “At $1.4 trillion in outstanding volume,
the loan market has nearly doubled in size since 2015, with a
significant deterioration in quality. Due to the floating-rate
nature of these instruments, underlying borrowers are
particularly vulnerable to the double whammy of weaker earnings
and rising interest rates. A downgrade wave is imminent,
extending through the next few quarters.”
Another piece noted new highs in CCC spreads. Credit quality seeing renewed emphasis.
