18th July 2018

And now, the end is near…

MARKET CLOSE:
iTraxx Main

64.0bp, unchanged

iTraxx X-Over

291.8bp, +2bp

🇩🇪 10 Yr Bund

0.34%, -1bp

iBoxx Corp IG

B+130.5bp, unchanged

iBoxx Corp HY

B+389bp, -0.5bp

🇺🇸 10 Yr US T-Bond

2.88%, +2bp

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Headline risks fading for the moment…

It’s just as well the Brexit debate continues to rage, because there isn’t too much to focus on elsewhere. There will be some light relief that UK inflation number was stable at 2.4% in June & below market expectations, and now making highly unlikely that the BoE will raise rates at its 2nd August meeting.

Sterling took a blow as that and the messy Brexit/political situation saw it close in on $1.30 the figure. Equities received a mild boost from the lack of real negative news, for a change, with the FTSE almost back to flat for the year. Even the DAX was up by another 0.8% and now only around 150 points away from also being flat for the year (-3.4% still). Bitcoin’s probably worth a mention, as it has risen from the below the $6000 a coin level to almost $7500 in a month.

In credit, we certainly are not focusing on the IG non-financial plain vanilla all-important corporate bond market. We want to but unfortunately, we have a dearth of issuance in primary and secondary isn’t proffering too much of an alternative, as investors are sidelined unless we get that issuance. As we might expect now, Wednesday’s session drew another blank in euro-denominated corporate bond supply with senior and subordinated financials issuance also taking the day off, although Goldman did print £1bn in the sterling market in an 11-year maturity at G+190bp.

With Trump having to row back on his initial comments regarding Russia’s involvement in the US elections, the massive embarrassment caused might see him disengage a little with Twitter for while (hopefully!). He was back on it on Wednesday, but comments were a little more innocuous. Headline risk in the near term might, therefore, recede while we await the WTO Chinese case to play out. The UK Parliament will soon be in recess too for the summer, meaning we might just not get that summer of discontent. That means equities can edge higher over the next few weeks, and we can therefore expect credit spreads to do the same.

So a little chink of light gives us reasons to be cheerful for the very near future. That doesn’t necessarily see investors pile into secondary but the tightening could see us closer to B+120bp (iBoxx index) rather than B+140bp – and currently resides at 130bp – by the end of the summer.

Should rate markets hold at or around these levels then we are going to look for higher beta credit to outperform and, while that might not take in the plain vanilla high yield market, we do think the subordinated bank debt market (AT1) might be in for a decent rally. The contingent convertible iBoxx index, for example, currently resides at under B+500bp representing a 135bp widening this year, but is 50bp off the wides seen at the beginning of July. Time for a nibble?


Slowly but surely

The US earnings season will soon be picking up a head of steam. For Wednesday, in the banking sector the latest heavyweight to report saw Morgan Stanley produce a bumper set of results for the second quarter, with net income up a massive 33%. Fed chair Powell was up before Congress for the second day and so that put bit of a dampener on proceedings.

Still, European stocks were on the up and managed solid gains, even if the US markets were a little more tentative about coming forward. In rate markets, the Gilt yield on the 10-year dropped 4bp to 1.22% on those inflation figures and betting that a rate hike will not be announced in a couple of weeks whence the BoE’s MPC meets. Bunds were slightly better bid too, the yield on the 10-year falling a touch to 0.34% (-1bp) while the 2-year (-0.64%) and the 5-year (-0.28%) are still hovering at recent lows. Treasuries were unchanged for the most part, although later the 10-year yield pushed to 2.88% (+2bp) and the 2-year was unmoved at 2.61%.

In credit, the synthetic iTraxx indices didn’t too much, reflecting the overall lack of headline and/or other risks in the session. Equities might have managed a decent rally but that didn’t feed through into boosting protection costs (lowering them). iTraxx Main closed unchanged at 64bp and X-Over was just 2bp higher at 291.8bp.

The Markit iBoxx IG cash index closed the session unchanged versus the previous one, highlighting the lack of activity in the secondary market amid little reason to push on in any direction. And so it turned out the same way in the high yield market, the index effectively unchanged at B+389bp.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ 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 CreditMarketDaily.com.