Investment Grade Weekly Insight 12/08/2017

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $1.357bln. This brings the YTD total to +$318.643bln in total inflows into the investment grade markets. IG fund flows remain on pace for the strongest year on record. Per Goldman Sachs, year-to-date cumulative inflows into IG mutual funds account for just 13% of AUM while ETFs continue to grow at the expense of mutual funds –ETFs account for 32% of AUM growth thus far in 2017. According to Bloomberg, investment grade corporate issuance for the week through Thursday was $17.315bln, and YTD total corporate bond issuance was $1.32t. Investment grade corporate bond issuance thus far in 2017 is nearly flat, trailing 2016 issuance by 1% year-to-date. The Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 97 as we go to press on Friday morning. The OAS hit 94 for 5 sessions in October, so we are still modestly wider than the tightest levels that we have seen thus far in 2017 and within distance of the tightest level since 2007 when spreads bottomed at an OAS of 82. We have quite a ways to go if we were to flirt with all-time tights of 54, last seen in March of 1997.

(Bloomberg) Expect Negative Excess Returns in Global Credit: MS’s Richmond

• Investors can expect negative excess returns across global credit in 2018, and we are later in the credit cycle than people generally realize, Adam Richmond, Morgan Stanley’s head of credit research, said on a panel yesterday at the Bloomberg Intelligence Credit Outlook Forum.
  • “You don’t need a recession to get negative returns late in a cycle,” Richmond said
    • Haven’t been three straight years of positive excess returns in credit since 1996; 2017 will be the third year, so it may be due for a year of negative excess returns
  • Richmond predicts spread widening in credit across the globe. Caution is required, this is a global phenomenon
    • Volatility was artificially compressed by central bank policy and now the dynamics are changing. It’s not just the Fed that is entering rate-hike phases; ECB, PBOC, BOE are moving in that direction too. Even the BOJ is increasing its yield-curve target later next year
  • “But from a valuation perspective it’s a challenge wherever you look in the world”
  • “We can’t tell investors to just sit in cash, so our answer is, be invested, but this is the time in the cycle to be very picky and to be up-in-quality, and so while it’s boring and investors don’t want to hide out in defensive credits, we think you’re supposed to do that”
    • Take IG over HY. Investors may want to be in Single-As over BBBs in IG bonds. Focus on sectors that will be relatively unscathed through a credit cycle, such as U.S. financials. “This is very much not going to be a financially-driven credit cycle, so this sector will behave more defensively”

(Bloomberg Law) Forget AT&T-Time Warner. Watch These Non-Media Mega-Deals

• Media mergers are big news lately with the Justice Department’s lawsuit to stop AT&T Inc. from merging with Time Warner Inc. and Sinclair Broadcast Group Inc.’s effort to buy Tribune Media Co.
• But the laser focus on media consolidation may cause the big mergers in other industries to disappear under the radar. There are notable mega-mergers (well above $10 billion) slated to close next year in agriculture, aerospace, oil, and apparel. CVS Health Corp.’s bid to buy Aetna Inc. for $67.5 billion can be added to that list, although it has not yet had its initial antitrust review.
  • Bayer-Monsanto is the last of three seed-pesticide company pairings announced in 2015-16. The transaction faces continued resistance since it was announced in September 2016. Bayer’s agreed price has since dropped from $66 billion to $63.5 billion.
  • Eyewear giants Essilor International SA and Luxottica Group SPA announced a 45 billion euro ($53 billion) merger in January. Their businesses are largely complementary, but antitrust regulators are still focusing on potential losses in competition. Essilor is the largest supplier of ophthalmic lenses worldwide, and Luxottica is the largest supplier of eyewear worldwide.
  • Industrial gas giants Linde AG and Praxair Inc. announced a deal on June 1, 2017 for $41 billion to create the world’s largest industrial gas supplier. The combined company would leapfrog current market leader Air Liquide SA, which merged with Airgas Inc. in 2016 for $13 billion.
  • United Technologies Corp. announced a $23 billion bid for Rockwell Collins Inc. on Sept. 4, 2017. The deal unites two aerospace behemoths that together equip commercial and military aircraft from “tip to tail.”

(Bloomberg) AT&T Commits to Time Warner Deal Even as Judge Delays Deadline

• The U.S. Justice Department’s antitrust lawsuit to blockAT&T Inc. from buying Time Warner Inc. will go to trial March 19, a later date than the companies had sought to begin their epic legal fight with the government.
• With the trial more than three months off, AT&T and Time Warner will have to extend their self-imposed April 22 deadline for completing the $85.4 billion deal. U.S. District Judge Richard Leon said Thursday in Washington that the companies should push back the cutoff date by 60 to 90 days to give him time to make a decision.
• “We will promptly discuss the court’s post-trial schedule with Time Warner,” AT&T General Counsel David McAtee said in a statement. “We are committed to this transaction and look forward to presenting our case in March.”
• If approved, the deal would reshape the media landscape by uniting a telecom giant with the owner of CNN, Warner Bros., TNT, TBS and HBO. AT&T, the owner of DirecTV, is the largest pay-TV distributor, as well as a powerhouse in mobile phones and landlines. The Justice Department has argued that letting AT&T own the films and TV shows that flow down its pipes would harm consumers and competitors.
• Under their current agreement, if AT&T and Time Warner fail to complete their deal by April 22, they can choose to extend the deadline or either party can walk away. If the judge blocks the deal, AT&T must pay Time Warner a breakup fee of $500 million.
• “This is not a normal case from many perspectives,” Leon said from the bench Thursday. He estimated the trial would take about three weeks. “This is going to be a lot of hard work and a lot of sacrifice.”

(Bloomberg) U.S. Payrolls Rise 228,000; Wages Gain Less Than Forecast

• The U.S. added more jobs than forecast in November and the unemployment rate held at an almost 17-year low, though below-forecast wage gains suggest the labor market still has slack to absorb.
• Payrolls rose 228,000, above the median economist estimate of 195,000, after a downwardly revised 244,000 advance, Labor Department figures showed Friday. Average hourly earnings increased 2.5 percent from a year earlier, less than the 2.7 percent projection, and October’s figures were revised lower.
• The data provide a clearer picture of the labor market after volatility caused by two hurricanes mostly dissipated, though there may have been some lingering effects. While the job market remains a bulwark for the economy and investors see a Federal Reserve interest-rate hike next week as a near- certainty, the lack of acceleration in wages remains a puzzle that could factor into the pace of increases in 2018.
• Average hourly earnings rose 0.2 percent from the prior month following a revised 0.1 percent drop, the report showed. Analysts had penciled in a gain of 0.3 percent for November. The gain from a year earlier followed a downwardly revised 2.3 percent advance for October.
• Economists expect that in time, wages will post a sustained pickup, which has remained elusive in this expansion even though labor-market slack is steadily disappearing. Faster gains in paychecks would boost consumer spending, which accounts for about 70 percent of the economy. Jerome Powell, President Donald Trump’s nominee to head the Fed, said last month at hisconfirmation hearing that he doesn’t see wages signaling any tightness in the labor market.