2nd January 2018

… and we’re off!

MARKET CLOSE:
iTraxx Main

45.2bp, +0.2bp

iTraxx X-Over

233.6bp, unchanged

10 Yr Bund

0.47%, +4bp

iBoxx Corp IG

B+95.2bp, -1.2bp

iBoxx Corp HY

B+287bp, +0.7bp

10 Yr US T-Bond

2.47%, +6bp

FTSE 100 , DAX , S&P 500 ,

Here we go again

Well that’s that, then. We open the page into a new year which most likely will close in 12 months time with us back to normal, meaning that we’re somewhere in the middle or end of a cyclical economic upswing – and we will be investing/positioning for it. Until then, it is business as usual.

Get that higher beta risk on board. It wasn’t a particularly exciting start to proceedings, but that is to be expected given it was the opening session of 2018, and we do have the US non-farms employment report to look forward to on Friday. There were a couple of financial borrowers issuing covered and senior bonds in sterling and dollar currencies, and we would not be surprised if a few non-financial corporate issuers of the frequent-borrower ilk test the waters this week. However, we think it will be more of a case of getting the serious business started sometime next week.

Back in the saddle, we were greeted by some very upbeat economic news centred mainly on Eurozone manufacturing activity. The region’s PMI for the sector came in at record 60.6 (records began in 1997) with the only blot on the landscape being Italy. Italian manufacturing PMI came in at 57.4 (still decent – and recording an expansion) against expectations of 58.3, for last month.

Overall, this was excellent news for the Eurozone’s economic outlook and looks set to see good levels of growth for the foreseeable future. The euro strengthened – probably on the back of the numbers – and went up further through $1.20 representing potentially a headache for the ECB.

That headache is inflation. Because it means the push for higher inflation will likely be stymied. So we have growth, below target inflation levels and policy unlikely to change anytime soon. The markets will like idea that policy stays accommodative for a good while longer, confident that funding costs remain low and market rates stuck in tight ranges at around current levels. And those bubbles across most asset classes – if that’s what they are – sustained, if not pumped up some more.


And little has changed

So judging by the news flow on the macro front, little has changed as we jump over the line somewhat effortlessly into 2018. It’s simply a case of more of the same. Small up in a session, or a small down – only for corrections to follow and then a move higher or higher depending on the market. Risk assets are set to rally more. However, equities in Europe didn’t exactly go higher in the session (lower by up to 0.5%), but they will correct the opening day’s losses and we expect rise in line with a risk-on environment soon enough. US stocks though were powering ahead and trying to set new record highs in some cases. Rate markets failed to find a bid and we saw something of a better offered market with yields higher across the board. The 10-year Gilt yield rose to 1.29% (+10bp) even as December’s manufacturing PMI disappointed at 56.3 (expectations 58.3), the US 10-year to 2.47% (+6bp) and Bunds were yielding 0.47% (+4bp) in the same maturity.

In credit, there was no euro-denominated issuance but that will also correct. As a reminder, we are looking for a heavy opening quarter in line with most other years, with IG issuance to close the year at somewhere in the region of €265bn which will be the average level of the past five years. For high yield, last years €75bn record issuance looks like it will not be broken. We can think of somewhere in the context of €55-60bn for the full-year, and if this level does materialise, than that would be an excellent level of supply. The demand is certainly there, and will stay intact for at least so long as the ECB is lifting €1-2bn of IG debt per week.

The better tone will elicit a continued tightening trend in spreads and high/low beta compression. Most are already positioned for it, and should continue with that strategy. We look for Market iBoxx index cash spreads in IG to tighten by 15bp this year (to record tights) while the HY index can tighten by 40-50bp (and also record low levels). This tightening is going to be measured, laboured we think, but will possibly leave us with 1-3% of total returns across IG/HY markets if underlying (government bond) yields are compliant.


Credit treads water

There was little in the session to entice corporate bond market investors into action. So a very quiet day ensued. We didn’t even get the usual ECB corporate bond purchase update, although it is expected on Wednesday. Up until the last reporting date, on 22 Dec 2017, the bank had an IG non-financial corporate bond portfolio of €132bn, representing some 17% of the eligible IG market.

They will continue lifting paper for another 9-months at least, probably at a pace of €6bn per month meaning that they would have taken down close on €200bn of corporate debt since they started purchases (18-months ago now). It has been a huge help to the market from a performance perspective (spreads tighter, returns firmly positive), while it is difficult to judge whether they impacted secondary liquidity that much given that it was so poor anyway.

Anyway, with many players absent until next week, little happened in secondary. The synthetic indices outperformed equities and closed pretty much where they opened with Main at 45.2bp (+0.2bp) and X-Over unchanged at 233.6bp.

The Market iBoxx cash index was marked at B+95.2bp (-1.4bp) but most of that would have month-end index changes given the lack of activity and absent a noticeable push by the Street to make anything tighter amid weaker stocks. Still, the index only has a basis point of tightening to go in order for it reach a new record tight. As if to demonstrate that index change being the main reason for the tightening, the high yield marked closed 0.7bp wider, at B+287bp.

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.