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17th July 2019

Corporate bond market QE – please no!

MARKET CLOSE:
iTraxx Main

50.2bp, +0.4bp

iTraxx X-Over

248.7bp, +2.8bp

🇩🇪 10 Yr Bund

-0.29%, -4bp

iBoxx Corp IG

B+116.2bp, +0.7bp

iBoxx Corp HY

B+412bp, +7bp

🇺🇸 10 Yr US T-Bond

2.05%, -7bp

🇬🇧 FTSE 100

7480.69, (+0.93%)
🇩🇪 DAX

13323.69, (+0.90%)
🇺🇸 S&P 500

3276.24, (+0.98%)

QE ‘fix’ unwelcome…

The corporate bond market is anything but broken. Issuers are easily funding at or close to their lowest ever levels. Investors are hugely receptive of deals – across the ratings spectrum, and by a large margin. Demand for new corporate debt is holding at oversubscriptions typically in the 3x – 7x area. In IG non-financials, the annual run rate is close to a record level, senior offerings are rising and high yield borrowers are also being funded, rather easily.

We would wonder what the objective might be if the ECB get involved again. After all, there is little or no need to reduce borrowers’ funding costs by giving the markets a nudge. There’s plenty of demand from investors with (iBoxx index) yields at record low levels and spreads in some markets heading that way too, again.

It appears in credit as if we have established the set-up for the summer weeks. We’re going to grind a little better in spread terms, returns are likely going to hold up because rates having had their wobbly now appear to have a fresh footing while primary has already slowed. We should come out the other side (at the end of August) with IG spreads heading inexorably towards that B+100bp mark (iBoxx index, currently at B+115bp, -48bp year to date), and total return investors sitting on returns of 10%+ for AT1, in the 8% area for HY and around 6% in IG.

The deals at the moment are hitting the screens with little or no competition but highlighting the grab for yield include Monte Dei Paschi’s T2 offering (coupon of 10.5%, it paid 5.375% in Jan 2018) and after an 18-month absence, Greece’s new administration was back for €2.5bn in a 7-year (with just a 1.9% yield).

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