9th January 2017

Make hay while the sun shines

MARKET CLOSE:
FTSE 100
7,210, +15
DAX
11,599, +14
S&P 500
2,277, +8
iTraxx Main
68bp, unch
iTraxx X-Over Index
287bp, +4bp
10 Yr Bund
0.29%, +2bp
iBoxx Corp IG
B+134bp, unch 
iBoxx Corp HY Index
B+387bp, -3bp
10 Yr US T-Bond
2.42%, +6bp

The credit market expects…

Who isn’t expecting to witness one of the busiest periods in the primary markets this week? After a flurry of deals taking in all sectors of the bond market (except HY) in the opening week of the new year – and against most investors’ expectations, we can only anticipate more of the same. All the roadshows at the back-end of last year, along with the usual flurry of borrowers looking to get some early funding away, suggest a burgeoning pipeline.

With investors all back in the saddle following the prolonged yuletide break, there’s much business to get done. Last week’s €5.5bn of IG nonfinancial prints may have been hit-and-miss from a secondary market performance perspective, but that won’t deter banks/syndicates from playing the new issue pricing dynamic the same way. That means that “relatively” cheap IPTs will translate into final pricing ratcheted tighter (by 15-20bp) as books in the region of 3-5x oversubscribed embolden them to do so. The drop-outs will barely be noticed.

We’re probably all going to get carried away with it – If only for fear of missing out. Will growth be enough to warm the credit and equities markets without necessarily promoting the credit rotation (to equities) trade? That might be a question which needs closer attention and inspection into Q2.

For now, it is going to be about deals, getting invested, using up those inflows (they’re coming in) and trying to clip some performance in these opening few weeks. That’s about it for the corporate bond market. It’s all about primary and the need for investors to get involved. Or be damned.

The broader economic outlook as judged by last week’s rather upbeat data prints in across the global space suggest that we have some good data to follow on the economic front. Industrial activity appears to be picking up everywhere, the service sector is motoring along, inflation is creeping higher, unemployment is declining and Trump is coming. Since when has it ever looked so good!

That is going to sustain the bid for risk assets (especially equities), credit will stay firm for the moment from a spread view-point, while government bond market investors have a little more to think about. The US non-farm payroll print of 156,000 for December was decent (November data revised higher) while there is growing evidence of wage increases becoming entrenched, leaving President-elect Trump to inherit a relatively robust domestic economy.


High yield shines in the opening week

A £300m eight year trade from the German chemicals giant last week

The secondary corporate bond market hasn’t elicited much activity in the opening week, but the high yield market is where the performance has come. In investment grade, spreads have largely been unchanged, the broad Markit iBoxx index for IG credit showing up at B+134bp.

Sterling credit has seen better spread performance with the iBoxx index closing at B+147bp (-5bp) and we also had BASF print in sterling. The performance in sterling spreads has been a surprise, although total returns for the week are in negative territory owing to the weakness in Gilt markets.

In the high yield market, bereft of any meaningful issuance for a while now and initially upbeat markets around global macro have combined to push spreads better. There has been some good performance in spreads and returns. The Markit iBoxx index is tighter by 25bp for the week at B+387bp (making a mockery of our more conservative year-end target of 380bp!), while returns show a positive 0.8%.

The same sort of performance dynamic (IG versus HY) ought to have been seen in the iTraxx synthetic markets, but Main has actually outperformed X-Over in the week. The former is down at 68bp (-4bp in thre week) while X-Over has backed-up off the lows to move to 287bp (-1bp).


Limited data flows to keep credit markets focused

Alcoa: Q4 2016 results kick off the earnings season

The earnings season will vie with Trump’s first press conference – and inauguration next week, for the headlines throughout the rest of January. The banks will be in focus at the end of the week after Alcoa kicks-off the Q4 2016 results season, while a whole host of Fed speakers will be on the tapes.

Retail sales figures for December are the main data item for the US. In the Eurozone, focus will be on the unemployment rate and industrial production numbers for December.

The government bond markets are probably the ones that credit market participants will have a keen eye on. Their movements will impact funding costs for borrowers and total return performance for investors. The non-farm report at the end of the week has a few nervous, and yields did push on after its release.

Overall, though, that’s not a whole lot that we will have to contend with. Therefore, we think that the signs are good and that markets will be supportive of – and expecting – significant supply in primary. There is no reason why the week can’t deliver €10bn+ in IG non-financial issuance, given the upbeat tone around risk assets. We would think that the near €7bn of senior debt issuance is unlikely going to be repeated though, while the HY market could furnish us with a deal or two.

Overall, we think that we can look for another subdued week though in secondary, but with spreads better bid for choice.

Have a good day. We will be 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.