10th January 2017

And still they come

MARKET CLOSE:
FTSE 100
7,235, +24
DAX
11.564, -35
S&P 500
2,268, -8
iTraxx Main
69bp, +0.5bp
iTraxx X-Over Index
290bp, +2bp
10 Yr Bund
0.27%, -1bp
iBoxx Corp IG
B+134bp, unchanged 
iBoxx Corp HY Index
B+383bp, unchanged
10 Yr US T-Bond
2.37%, -5bp

Nothing else matters for credit markets…

It might have been a fairly subdued start to the week in stocks and government bond markets, but corporate bond markets have continued where they left off last week. More supply and plenty to keep investors occupied as borrowers take advantage of the early new year upbeat tone towards the corporate bond market as is traditionally the case.

We had more sterling corporate issuance, a couple of euro-denominated IG non-financial corporate deals, senior and subordinated bank deals as well as the usual covered bond issues. The account for the high yield market in primary is still unopened. By continuing where they left off last week means that secondary was fairly subdued with spreads left unchanged mostly.

Big deal: Credit Agricole issued €1bn

In detail, Credit Agricole issued €1bn in senior preferred (“old” style) debt and Commerzbank €500m in a long 10-year Tier 2 issue. American Honda became the latest auto group to print with a €300m issue some 18bp inside the initial price talk for 7-year funding.

HeidelbergCement was the year’s first non-financial borrower without an “auto-flavour” about it. The borrower – long a darling of the German retail/institutional investor base, but with a superb following elsewhere too – took €750m in 4-year funding and at a stunning 25bp inside the initial pricing guidance. The company also recently regained its investment grade status from all the rating agencies, having languished in the sub-investment grade category for several years following some acquisitions. Italy’s Enel was back with a €1.25bn lift for a long 7-year maturity Green bond.

Daimler visit the sterling market with a £450m issue while Nestlé issued an increased $650m in 5-years.

The three IG non-financial borrowers yesterday added €2.3bn to the tally of issuance this year and we are already up at €7.8bn. There is still a good week to go from an issuance perspective before we potentially hit the first hurdle which might slow us down – Trump’s inauguration as US President.

Overall, we’re probably looking at a month that might deliver somewhere of the order of €25-30bn in issuance. The secondary performance might not be fantastic as yet, but given how IPTs have been rammed tighter, that’s not really a surprise.

Some might think it, but it does not suggest indigestion, given activity in secondary has been light for years anyway. It just suggests that there is (or has been) nothing going on (relatively) in the secondary market.


Fixed income markets holding their ground

The economic news flow saw unemployment in the Eurozone stuck at 9.8%, but that is off a high a couple of years ago of 12%. The weak euro boosted Germany’s trade surplus while German IP for November also beat forecasts. It’s all good so far as the Eurozone economy is concerned as it continues its slow and fairly laboured recovery.

In the UK, house prices continued their ascent according to one survey, while sterling came under pressure versus the euro (good news for exporters). The next few UK inflation numbers will make for an interesting read.

Eric Rosengren: Three rate hikes reasonable in 2017

The Boston Fed’s Rosengren suggested that three rate hikes in 2017 would be a reasonable expectation for the markets, but the comments didn’t have a discernible effect on government bond yields. Those yields were edging lower before the remarks – and stayed that way after them.

The 10-year US Treasury yield was at 2.37% (-5bp) while the equivalent maturity Bund yield was down a touch at 0.27% (-1bp). Gilts were slightly better bid, the 10-year yielding 1.34% (-3bp) while sterling was down against the dollar ($1.21) and the euro (€1.15).

Equities were a small up or down with no major push for yet another session following several similar ones into the back end of last week. Finally, oil prices slipped a little – because they could. Time for fears to return around this commodity, given that the recent rise in prices might see a renewed effort from the shale gas industry – and which saw Brent lower and trading off a $54 per barrel handle (-4%).


ECB back in amongst them

The ECB lifted €1.8bn of corporate bonds since it last reported (on 30 Dec) its holdings and is now back in amongst it, taking close on 10% of the available market in IG corporate credit. As we have suggested previously, these bonds are not going to re-emerge and are a permanent extraction of liquidity/bonds from the market.

Spreads ought to be ratcheting tighter as a result, but they haven’t been given that the focus for investors is the primary market. For the moment, one could argue that there might be a crowding-out effect as we see some compression between high and low beta credit, but we’re not sold on the idea as yet. High beta – rather, high yield – has been in the ascendancy of late owing to the feel-good factor around high yielding fixed income product.

Still, the Markit iBoxx index is at B+134bp and barely moved in the session. The same was evident in the high yield market with spreads here also unchanged and the index left at B+383bp. The synthetic indices also moved in tight ranges with Main eventually left at 69bp and X-Over at 290bp.

Have a good day. Back tomorrow.

Suki Mann

A 24-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.