SRT market projections include spreads firming up and incrementally worsening credit risk outlook.

While we enter the final quarter of the year, September was characterised by central banks and the significant easing priced in by markets. Such vision and prediction for a more aggressive rate-cutting cycle by major central banks has led to a bull steepening of yield curves. After the 50 bps rate cut by the Fed in the US, markets have been pricing in a more gradual Fed cutting cycle. Similarly in Europe, the ECB delivered a 25bps rate cut, in line with market expectations and the inflation slowdown, reducing its deposit rate to 3.5%. However, the Bank of England resisted the trend and kept its policy rate unchanged at 5% last month, with members voting 8-1 in favour of holding rates, broadly in line with market forecasts. However the broader macro backdrop remains unusual, notably with the intensification of geopolitical tensions. In this tempestuous context of geopolitics, recession risk, continuous repricing of central bank expectations, and idiosyncratic corporate downgrade events, there are many uncertainties that will affect short-term returns.

Regarding the SRT market, investors continue to report strong growth fundamentals, largely based on a strong and heavy second-half pipeline. Spreads for new issue ranged from 800 to 1000 bps over the past couple months, marginally tighter than recent prints. Recent transactions have notably included collateral pools concentrated in the levered finance and mid-corporate spectrum. However and following traditional SRT issuance calendar and momentum, we should expect a higher proportion of large corporate, investment grade-heavy deals to come to market towards the end of the year.

SRTx Spread Indexes, in kind with structured finance and the broader corporate markets, have slightly firmed month-on-month. As a result, figures have tightened across the board (Large corporate: EU -2.7% US -4.6%; SME: EU -3,1%, US -1.2%).

The SRTx Spread Indexes now stand at 975, 636, 1,993 and 1,025 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 4 October valuation date.

While last month’s fixings highlighted a clear re-adjustment following momentary market volatility at the beginning of the summer, the volatility outlook denotes little change. In Europe (Large corporate: -14.3%; SME: -14.3%) sentiment is projecting relative steadiness. However figures in the US (Large corporate: -3.8%; SME: 0.0%) still sit above the 50 benchmark, suggesting and anticipating slightly elevated market volatility.

The SRTx Volatility Index values now stand at 50, 63, 50 and 63 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.

Regarding liquidity, the SRTx Liquidity Index values show very little change in the liquidity sentiment month-on-month. However the mixed figures possibly suggest or reflect the general view that investors want more paper, yet there isn’t enough to go around (Large corporate: EU +1.3% US -2.8%; SME: EU +1.3%, US -12.5%).

The SRTx Liquidity Indexes stand at 46, 44, 46 and 44 across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively.

Finally, the SRTx Credit Risk Indexes reflect an incrementally worsening sentiment. Analysing it from a performance standpoint, broader figures point to an incremental deterioration in credit risk and credit performance delinquencies (notably in the commercial space). The latest fixings suggest that rather than being widespread, such sentiment is creeping in (Large corporate: EU +14.3% US +30.0%; SME: EU +14.3%, US +30.0%).

The SRTx Credit Risk Indexes now stand at 57 for SRTx CORP RISK EU, 65 for SRTx CORP RISK US, 57 for SRTx SME RISK EU and 65 for SRTx SME RISK US.

SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.

                                                                    Vincent Nadeau