Grappling with market volatility; predicting yields and a pickup in bond issuance

Published on 8 January 2024

Robert Daly, director of fixed income at Glenmede Investment Management, discusses the challenging start to the year across markets and where he is placing his chips going into this week. He also provides his outlook on credit; he predicts where he thinks yields will be in six months, and unpacks why he thinks bond issuance will see a strong pickup this year.

Transcript of interview:

Jo Gallagher: Welcome to Trader TV this week – your insight into our trading desk to prepare for the week ahead. I’m Joe Gallagher. Today I’m joined by Robert Daley at Glenmede Investment Management to discuss the main topics and events leading into this week.

Robert, welcome to the show.

Robert Daly: Thank you for having me, Joe. Appreciate being here.

Jo Gallagher: Before we begin, let’s take a quick look at last week’s activity and what’s coming up.

In North America, last week’s equities volumes recovered from the holidays levels much higher than those seen at the beginning of 2023, yet much of that was selloff activity, as markets now believe will not see an early rate cut from the fed this year. Despite the pressure on stocks, liquidity looked exceptionally good last week and the spreads were dramatically tighter than historical averages seen for the same week for the previous five years.

Last week, US investment grade trading saw lots of downward pressure. Some daily volumes even mimicked those seen during the mid December rally, and levels were much higher than averages seen for the first week of January for the past two years.

Liquidity in IG was the worst it’s been since July if we disregard the final two weeks of December, yet the average daily bid ask spread was still tighter than that seen for the same week of January 2023.

In terms of data, we’ll have US core inflation numbers and initial jobless claims on Thursday and a fresh look at figures for producer prices on Friday. This week, we’ll also have Q4 earnings from heavyweight financial firms such as JP Morgan, Bank of America and Wells Fargo. In primary equities, there are three IPOs expected to price at $170.4 million in aggregate proceeds, with the largest deal expected to be Smith Douglas Homes, which is seeking to raise $150 million.

US axe data, which is in historical ranges, indicates dealers asks have increased by 5.6% over bids in the past week, suggesting a sizable increase in net selling of credit going into the week ahead.

In Europe and the UK. Last week’s equities markets roared back to life, seeing substantially higher volumes than those recorded for the first week of January for the past two years. Liquidity seemingly stabilized following the holidays and was ranging around average levels for the same week of 2021 and 2022. Yet spreads are much tighter than those seen at the beginning of 2023.

European investment grade volumes have yet to bounce back, seeing some of the lowest level since last September, and were down substantially compared to the highs seen at the tail end of last year. Liquidity improved relative to the final few weeks of December, but the average daily bid ask spread was the widest it’s been since August of last year.

This week, we’ll have the EUs unemployment rate at on Tuesday, and the latest reading of the UK’s GDP numbers on Friday. We can also expect a new batch of Q4 earnings out of Europe, among them are retail giants Tesco and Sainsburys. Yet again, there are no IPOs expected to price on European exchanges this week.

EU axe data, which is within normal ranges, indicates the proportion of EU dealer’s asks versus bids has increased by a substantial 13.1%. GBP dealer asks are up by a huge 16.4% against bids over the past week, suggesting a very strong leaning towards selling versus buying of credit going into the week ahead.

Robert, lots to discuss there. What is your trading strategy going into this week and how do you expect market conditions to look?

Robert Daly: The beginning of this year has been choppy, illiquid. After the huge rally we saw in the last two months of last year, your starting point is hard and that is, you know, something we’re grappling with. When you look at nonfarm payrolls, which came out on Friday, specifically average hourly earnings, there’s a robustness in the economy. The wage inflation dynamic is something that the market’s looking at, so inflation in general and where do we go from here.

So what are we doing for this week? We continue to like our positioning. We’re long investment grade credit, we are long mortgages, we’re neutral duration because of the rally and trying to engage where that footing is going to be next. I think rates are going to sell off a little bit, and I think that there is ample opportunity within fixed income, but you have to pick your spots, and we’re waiting to see when that opportunity arises. And I think we’re going to have better entry points over the next month or two to engage the market at large.

Jo Gallagher: We’ve had a rocky start to the year. How are you weighted in IG and high yield, and where do you see opportunities to take on risk?

Robert Daly: In IG we’re long investment grade credit. While it has rallied a lot, the opportunity is still there from a yield perspective, not spread perspective. I think spreads are tight. We would love to add more investment grade credit because we do like the fundamental backdrop of the asset class as spreads and or yields sell off. We don’t actively participate in high yield in our portfolios. That said, when I think about high yield, I think that there is value there. Yes, it’s not the mid eights or 9% that it was, its high sevens. But I think that there’s a lot of value there, specifically in double B and single B. I think the credit quality aspect is going to be something. You have to pick your spots correctly. Specifically, as we move toward a potential recession. Not our base case necessarily, but there’s been a lot of work done at the lower quality part of the stack, with the high quality part still remains quite attractive.

Jo Gallagher: And I would ask for your predictions. Where do you think yields are going to be in six months time?

Robert Daly: The million dollar question, but I think what’s going to happen is yields go higher. They’re already starting to do that. I think that, you know, we got to the tight end of the range just thinking about ten year treasuries. We’ve sold off a decent amount at the beginning of this year. I think we continue to sell off a bit. But you know, my line in the sand is four 50 on tens. I think we might not even get there. I think the buyers are going to come back before we get there, because the yields are attractive, and putting that money to work is durable for portfolio construction. It’s a balance and it provides income. And I think the next couple of weeks we’re moving higher in yield, and I think that there’ll be a spot where that yield then comes back down.

Jo Gallagher: What are your predictions for the issuance calendar in the US and Europe this year, and how do you expect markets to respond?

Robert Daly: The market response is one of demand, and I think we saw that demand come through much more than I would have thought in 23, given how yields had moved higher. So yields were about 89 basis points higher in the investment grade universe, but issuance in IG was about 1.2 trillion. That’s basically flat to 22. High yield, which is even more interesting was 179 billion, up 67% year over year from 22 to 23. Taking out the refinancing, that’s still 7% higher. Expect that demand to be the main driver of why issuance could pick up. And a lot of it has to do with the fact that yields have come down two and yields could come down more, which makes it more opportunistic for issuers to come to market, specifically when the demand profile is as robust as it’s been, because the technical backdrop is incredibly strong.

Jo Gallagher: Thank you, Robert, for your insight and of course to you for watching. This has been Trader TV this week.