25th September 2017


iTraxx Main

58.7bp, -0.3bp

iTraxx X-Over

259.6bp, +1.2bp

10 Yr Bund

0.40%, -5bp

iBoxx Corp IG

B+108bp, +0.8bp

iBoxx Corp HY

B+286.7bp, +4bp

10 Yr US T-Bond

2.22%, -4bp

FTSE 100

7,301, -9


12,595, +2.5

S&P 500

2,497, -6

German political event risk ‘ignored’…

The reduced level of support for Merkel and the surge of the far right managed to inject only but just a little uncertainty into the markets, despite the CDU’s German election victory. The fact that it wasn’t as straightforward a victory as the markets would have liked – with a new coalition make-up uncertain following a poorer showing by the Social Democrats, was enough to inject some clear apprehension into the opening session of the week. On reflection, that’s completely understandable given that the markets don’t like uncertainty. Still, the opening skirmishes might have been fraught with angst, but the session settled quickly and we ended fairly flattish without much of a fuss.

The CDU needs new partners for coalition government given that the previous one (the Social Democrats) has said that it will go into opposition, with a so-called ‘Jamaica alliance’ likely to be negotiated. That could take several months and potentially lead to some changes in policies from the Eurozone’s main economic powerhouse. Whatever, it promises to be a delicate situation for Merkel to manoeuvre and potential partners with the CDU will be extracting their political pound of flesh.

While the economists opine and some fret about what next, it does seem like it is yet another potential ‘destabilising event’ – in a long list of them over the past couple of years – which the markets are going to swat aside. In this case, there’s some method in that madness. After all, in say the corporate bond markets, why should a new coalition government (with the old guard generally in charge) lead to spread market weakness? We don’t think it should.

Weaker sentiment to risk assets in the immediate aftermath of that election might have dented investor willingness to add risk in secondary credit, but it is not as if they have been effusive in trying to lift whatever they can in secondary. More so, the primary market looks like seeing a session or so of fewer deals than we would like – and we saw that on Monday – but we expect it to settle and deals to flow soon enough.

Monday’s deals had a financial flavour to them, with CBA printing €1bn in a 12NC7 Tier 2 offering, VW Leasing taking a dual tranche combined €2.25bn in 3-year and 6.5 year maturities, while Sweden’s Hoist Credit was in for €250m in a 4-year deal. The only non-financial deal was the unrated (high yield implied) Suominen Corp with 5-year notes for €250m to yield 2.5%.

So we were left with an unremarkable session with European equities trading in a tight range while FX markets were more volatile. There was a better bid for safe-havens (Bunds). Credit spreads barely moved. After our close, US stocks took a leg lower on US/North Korean geopolitical event risk (see below). The Nasdaq took the brunt of US equity weakness, off by well over 1%.

Markets calm, €113bn up for the ECB

Gilts were unchanged for most of the session after last Friday’s downgrade of the UK’s credit rating to Aa2, although we edged lower to 1.33% (-2bp) into the close. Meanwhile, the prospect of increased taxation or higher levels of borrowing similarly didn’t impress either after the UK’s Labour conference heard the party hierarchy suggest they would bring the so-called private finance initiative (PFI) under the control of the state – if they win the next election. Maybe the prospect of a Labour government not happening – or that it is almost 5-years away still, had something to do with the bond market’s rather muted reaction.

Back to German politics and we had the leader of the AfD leave the party to stand as an independent MP. It just adds to the disarray around German politics. Still, it did little to impact Bund markets initially where the 10-year yield remained at 0.42% (-3bp) before we ended at the session lows of 0.40%. The US has its own issues, again around another Trump tantrum where he continues to alienate NFL teams and supporters, but we had the North Korean foreign minister suggest that the US had effectively declared war following some of Trump’s recent musings. Treasuries didn’t do much until then but we saw a better bid thereafter and the 10-year was left to yield 2.22% (-4bp).

As for the ECB, it reported that the latest week’s purchases of non-financial corporate debt came in at a much €1,765m versus €2,116m in the prior week and compares with €1,766m in the week before that. There might not be too much investor turnover as such in the secondary market, but the one with the deepest pockets, biggest reserves and greatest intent continues to lift a hefty amount of corporate debt every week.

ECB Weekly Purchases

The total purchases to date, after 68 weeks of market participation, stand at €112,954m with the long-term weekly average purchases at €1,661m. The big figure for the ECB’s QE haul is a stunning one, and represents some 15% of the eligible market. Small wonder corporate bond markets have displayed reduced levels of volatility over the past 17 months.

Anyway, in Monday’s session, iTraxx Main edged a little lower to 58.7bp (-0.3bp) while X-Over was higher at 259.6bp (+1.2bp). In cash, we were better offered for choice, amid light volumes. The Markit iBoxx IG corporate bond index closed at B+108bp (+0.8bp) and the HY index at B+286.7bp (+4bp).

Have a good day.

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