Inflation Rise Sees Market Shake Up and Desks Face Price Volatility Amid Debt Restructuring

Published on 15 April 2024

Sally Bartunek, trader at Ninety One

Sally Bartunek, trader at Ninety One, discusses how markets have woken up following the hotter-than-expected inflation data out of the US and how it’s impacting fixed-income asset allocations.

Bartunek also tells Trader TV how she’s concerned about the recent flurry of corporates such as Altice and Lumen, pushing back on creditors to restructure their debt and accept haircuts. She looks at the risks involved for investors and the impact on price volatility.

In emerging markets, Bartunek also unpacks the recent slew of fallen angels; and the surprising moves she is seeing in High Yield debt and Latin American (Latam) issuance.  

We have an extended version of the show only available to our email subscribers. In the full show, Bartunek breaks down the wider implications of the US’s move to a shorter settlement cycle on global investors, in the face of the impending deadline on May 28.

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North America: Weekly Review and Outlook on Markets

  • Last week, US equities volumes were down and bid-ask spreads looked much wider than the current-year average
  • Last week, US investment grade volumes were up marginally relative to 2024 levels and bid-ask spreads continued to improve week on week.
  • This week’s data: US Retail Sales out on April 15, Canada’s Inflation Rate is expected on April 16,
  • This week in primary equities: 5 IPOs expected to price. The biggest deal should be Ibotta Inc. at $450 million.

Europe: Weekly Review and Outlook on Markets

  • Last week, Volumes and notional values well below levels seen in Q1 and bid-ask spreads saw one of the worst weeks this year.
  • Last week, EU IG volumes declined over the last 3 weeks and bid-ask spreads are tight relative to the year-to-date average.
  • This week’s data: UK’s Unemployment Rate is out April 16, and the UK and EU’s Inflation print is out on April 17.
  • This week in primary equities: UK’s Unemployment Rate is out April 16, and the UK and EU’s Inflation print is out on April 17.

Interview Transcript

Presenter Jo Gallagher To kick us off put this week into context for us. What do we expect from markets this week and what’s your trading desk be focusing on?

Sally Bartunek You know, we’ve had a few weeks of some complacency in the market pre CPI. And when it surprised to the upside I would say that the market woke up a little bit. It generated some volatility so I think going forward we’ll continue to be data dependent and the big one to watch out for is retail sales. It just really gives a glimpse into what the Fed might do later on this year.

We also have earnings on stack as well. Last week we saw asset allocation offs coming through just because of the back up in yields. We saw some massive inflows into the US IG market because of the all-in-yield buyers waking up and stepping in. But then we saw some outflows on the Latam local REIT side because they use U.S. Treasuries as a proxy so some stops went through in the markets.

So it would really be interesting to see if that asset reallocation conversation continues and if there’s anything that might move the needle where investors will make a jump either way.

Presenter Jo Gallagher We’ve had some instances of major corporates pushing back on creditors to accept losses. How concerning is that for the debt markets and what might that mean for price volatility?

Sally Bartunek I would say it’s very concerning in that we, as investors, have to really scrutinize our credit selection process and really weed through those covenants to protect ourselves.

Some of these companies have a really high interest burden at the moment their funding costs are a bit higher than they’ve seen in the prior years, and because of that, they’re looking to cut costs by potentially making investors take a haircut. In one instance, Altice, when their restructuring headlines came through it generated some really strong price volatility.

Take into consideration the subordinate paper that they had in the span of two days. They moved 40 points lower. And during that interim, just from watching from the outside in, you can see dealers making these wide markets like five, ten-point markets on the screens just to try to generate some flow and price discovery there.

From our perspective, if we were to be put in that situation, it really is about communication between the traders and the PMs and what their end goal is.

There are investors that might be looking to throw in the towel, so not having a price limit on those bonds will help just really trying to weed through to find the other side. Whereas if you do have a price limit because you think that there isn’t much more downside, it helps to work in order with a dealer to see if they can find another side to match your level.

Presenter Jo Gallagher What parts of the high yield market such as downgrades maybe or defaults? Should fixed income traders be paying close attention to?

Sally Bartunek Well, we’ve seen an uptick in fallen angels. So basically bonds from IG ratings to high yield. But that hasn’t really affected performance in the way that you think it might.

Just speaking about high yield supply for a moment, we’ve seen over the past year issuers that were highly levered try to come to market and investors just weren’t biting and they were unable to refinance some of their debt or even just get the initial funding.

But the issuers that are a bit more high quality were able to come to market. And what that means is, compared to the IG markets, supply has undershot a bit and there’s a duration factor. So high yield duration is a little bit lower because the refinancings just weren’t there.

So the maturity stack up a little bit shorter whereas an IG duration is a little bit higher. So they were sensitive to the moves from last week. So if you look at total returns, high yield is still net positive for the year, whereas IG is negative due to the rate movements.

Presenter Jo Gallagher Looking at emerging markets, what are some of the interesting signs that we’re seeing in terms of corporate issuance?

Sally Bartunek It was surprising. In the first quarter, we saw a slew of issuances come through, and some of these issuers, we thought that they would wait for the local elections to come through, and they didn’t. And it looks like they are trying to get ahead of that potential volatility.

And then also some of them had funding needs where they had negative carry. So instead of losing money on that negative carry they came to market and invested in T-bills instead. So that’s a couple of examples of issuers that did come through. But there are some that were waiting and thought that we would get rate cuts by now. And they’re kind of kicking their issuances down the road.

I will say that the surprise and issuance has helped with secondary liquidity in the Latam corporate space, because those issuers have come to market and generate funding for those issues. And that’s names that we haven’t seen come out in size sometimes in the secondary markets. So it’s really helped generate some liquidity there.

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(Price volatility, inflation, markets, debt restructuring)