Markets Brace for Wave of Issuance, Earnings Volatility, and Summer Illiquidity

Published on 17 July 2023

Ryan Horan, IG / HY corporate bond trader at American Century Investments, discusses the challenging liquidity environment traders are facing and how desks should approach this week amid a new wave of bond issuance, a fresh batch of earnings, and the fall in market participation. He also unpacks his bullish views in some potentially undervalued subsectors.

North America

  • US equities volumes are low and liquidity looks poor for the year to date. Investment grade volumes are low but spreads are tight.
  • In primary equities: There will be several IPOs in Tech on Nasdaq on July 19.
  • Data: Retail Sales, July 18. US Housing numbers, July 19. Earnings: BofA, First Alliance, Tesla, Goldman Sachs.
  • US axe data, which is within normal ranges, indicates a higher proportion of bids versus asks in credit.

Europe and the UK

  • Equities volumes are very low yet liquidity is good for the Year to date. Investment grade volumes were at normal ranges but spreads were tight for 2023.
  • In primary equities: There will be several IPOs in Tech, Energy, and Healthcare on the London Stock Exchange on July 17 and Consumer Staples on Euronext on July 19.
  • Data: UK and EU Inflation Rate and CPI, July 19, and UK Retail Sales, July 21.
  • EU axe data, which is within normal ranges, suggests a higher proportion of EU dealer bids Vs asks in credit.
  • GBP axe data, within normal ranges, suggests a skew towards net buying Vs selling of credit.

Transcript of interview:

Jo Gallagher: Welcome to Trader TV This Week.

In North America we saw low volumes in equities last week, but mixed liquidity across assets. This week the seasonal slump could continue and are starting to bring about any major surprises and signs of sectoral weakness.

In Europe and the UK volumes were low to moderate across assets, but liquidity is good. This week’s activity will be driven by the latest reading of the UK and EUs inflation rate and earnings.

Now in more detail. In North America, last week’s equities volumes rebounded slightly compared to the week prior, but were overall low for the year. US stocks saw poor liquidity week on week and generally, bid ask spreads were wide for year to date levels.

Last week’s volumes in US investment grade debt were up compared to those of the week prior and were just below six and a half months rolling average. Liquidity appeared good across the US IG as spreads were tighter week on week and much tighter for the year.

In primary equities, we can expect IPOs and tech on Nasdaq on July 19th. This week is a quieter week in terms of economic data, but we can expect figures on retail sales and industrial production figures out on July 18th. We will also have US housing numbers on Wednesday, July 19th. Markets will also have a fresh batch of earnings to react to this week, including Bank of America, Western Alliance, Tesla, First Horizon and Goldman Sachs.

US axe data, which is in historical ranges, indicates dealers bids have increased by 2.1% over asks in the past week, suggesting an increase in their line of credit going into the week ahead.

In Europe and the UK last week’s equities volumes slid for the week on week and were very low for the year. Liquidity saw little change, but bid ask spreads were tighter than the six and a half month rolling average. Euro IG volumes were up week on week, but were hovering around normal levels for the year. Liquidity improved last week and bid ask spreads were generally tied for 2023. In primary equities, we can expect several IPOs in tech, energy and health care on July 17th on the London Stock Exchange. And year next will also have public offerings and consumer staples on July 19th.

This week, Europe markets could react to some crucial data points on the UK and eurozone inflation rate, the CPI numbers out July 19th and the UK’s retail sales out July 21st.

Desks will also be paying attention to the latest roll out of Q2 earnings. EU axe data, which is within normal ranges, indicates the proportion of EU data’s bids versus asks has increased by 4.3%. GBP dealer bids are up by 3.7% against asks over the past week, suggesting a skew towards buying versus selling of credit going into the week ahead.

I’m Joe Gallagher and now joining me to discuss the week ahead, we have Ryan Horan of American Century Investments.

Ryan, welcome to the show.

Ryan Horan: Good morning. Thank you for having me.

Jo Gallagher: Starting with North America, set the scene there. How should traders be approaching this week?

Ryan Horan: We think traders should be focusing on three things this week. It’s the start of the earnings cycle that was kicked off by banks on Friday and the primary market supply that’s likely to follow. Expectations are somewhere between 15 and 30 billion. Upcoming macro data, and then any response from Fed governors to that macro data.

Some of the themes that we’ve seen in the bank space have been an underperformance in the three and five year part of the curve and an outperformance in duration. Now, why is this?Expectations of this new issuance at 15 to 30 billion that I mentioned is likely to be with less duration heavy bonds. As we saw last week with both Royal Bank of Canada and TD Bank that came to market, both of which came with multi tranche deals. None of those deals were longer than five year part of the curve and we think the supply will likely follow a similar trend. The larger macro data on the month is largely behind us, PBI, CPI and non-farm, all of which came in slightly softer than expected.

This week we have retail sales, housing starts and jobless claims and if these softer data prints persist, we would expect to see, one, a US-continued rate rally and two, a softer credit environment. The themes of the past two months have been yield buyers and spread sellers. If the rate curve continues to grind lower, the yield bogey mandates will likely dry up and we’ll be left with just spreads sellers in the peak of summer illiquidity.

Lastly, as conviction remains low in both investment grade and high yield asset classes, we live and die by every macroeconomic data print and follow of speeches that are then given by Fed governors and their interpretation of that data, as we as investors hope to glean something about monetary policy so we can make larger conviction type trades.

Jo Gallagher: Give me an understanding of the liquidity environment right now. How will you be trading under those conditions?

Ryan Horan: So we continue to believe that we’re in a hard landing scenario with IG spread targets of 160 and a high yield market of 600. And we don’t really think that you’re currently paid to take risk with both of those indices at the local tighter ends of their spread range. We think, using a baseball analogy, that we’re in a singles and doubles type of market, not a home run type market, and you need to size your risk accordingly. You need to love what you own and you need to be patient and stay the course. Every passing day, we get further into the seasonal summer liquidity patterns, more extensive balance sheets, wider bid offer spreads and lighter staff desks on both the buy and sell side. Thematically, though, we continue to see buyers of corporate bonds that have been issued over the last six months and largely sellers of bonds that are issued 12 months and longer as accounts value liquidity over a compressed pickup and spread over and off the run bond.

Jo Gallagher: Where do you see value in real estate and other subsectors?

Ryan Horan: I don’t want to come off as sounding too bearish. We aren’t scared of taking risk. I think we’re just very selective of the risks that we take. Traders shouldn’t be putting on trades right now to make five basis points. They should be putting on alpha generating ideas for their clients that have 15-20 basis points of upside. We, as a fundamental, research-driven asset manager focus really on securities selection. And in that vein, we found some really interesting subsectors and names that we’ve been investing in. In retail rates which trade very cheap historically, the financials right now in the Yankee bank space, front end part of the curve, lower down the capital stack, we feel comfortable. We like peripheral European banks and the senior preferred part of the capital stack. And lastly, we’ve been adding the credits that we think are candidate for liability management exercises and bonds that we think can be taken out at their May core levels.

Jo Gallagher: Looking across to Europe, where are you weighted in terms of European bonds and what is your strategy there?

Ryan Horan: As a largely US-focused, risk based asset manager, our weightings in Yankee risk tend to be a little more underweight unless we think that there are market dislocations that warrant a larger allocation of capital. In that vein, with primary supply in Yankee bank risk largely behind us and valuations of those banks that still look cheap to their US peers, we see value in some of those credits. We also see value in a higher beta peripheral type Yankee risk, Bank Intesa, your Deutsche Bank’s of the world. And we’re comfortable going down in the capital stack both in euro and US dollar within the banking sector. We remain underweight in UK risk as we have concerns around the strength of the consumer, stickier inflation and largely monetary policy that we feel like is a little bit behind the curve.

Jo Gallagher: Thank you, Ryan, for your insights and thank you for watching.

This has been Trader TV This Week.