27th January 2017

Another brick in the wall

MARKET CLOSE:
FTSE 100
7,161, -3
DAX
11,849, +43
S&P 500
2,297, -2
iTraxx Main
69.75bp, +1.75bp
iTraxx X-Over Index
290bp, +4bp
10 Yr Bund
0.48%, +1bp
iBoxx Corp IG
B+132.2bp, -0.3bp 
iBoxx Corp HY Index
B+371bp, -3bp
10 Yr US T-Bond
2.50%, -2bp

Ending with an ooh and an aah…

The cancellation of next week’s meeting between Trump and Mexican President Nieto will be making many of the headlines. Prime Minister May’s trip to the US might just serve as a useful and timely distraction.

Positive: UK GDP figures

On economics though, we are closing out the week on positive note as far as macro is concerned, and especially in the UK. GDP in Q4 came in at a better-than-expected 0.6% and helped make the UK the best growing economy of the G7 group in 2016.

Brexit fears have been brushed aside, instead the currency’s weakness was fairly timely as it gave the economy a boost in the second half.

Sterling, though, has pushed on a bit into the recent data (off the lows but still well down on the pre-Brexit levels versus the euro and the dollar) so some slowdown in UK growth might be expected during this year.

Gilt yields have risen into it, passing 1.50% in the session in the 10-year maturity and leaving sterling corporate bond portfolios feeling a little hot under the collar as total returns decline. The BoE reported that it held £5.76bn of corporate debt. Nevertheless, those opening month-end returns will literally be dropping through the letterbox next week showing losses of 1.4%, quite possibly more. And herein lies the story for 2017 for the euro-denominated corporate markets.

Get the government bond market right – properly hedged – and you will get performance.

There are costs associated with the hedging (and that means even lower returns), but it looks like a strategy of this kind will be necessary if the Eurozone economy is on a sustainable recovery footing. Because yields will be going materially higher. As ever, it’s all in the timing.


Santander takes a punt, primary light

Santander: €1.5bn, 5-year deal

We got the first senior non-preferred deal from a bank not based in France, as Santander issued a €1.5bn, 5-year deal. The framework for such structurally senior subordinated deals is yet to be approved there – although a contractual clause in the documentation means that the issue will likely comply with EU requirements which are due to be approved later this year.

Still, there was good demand for the issue (3x subscribed) which allowed the pricing to be tightened by 15bp versus initial guidance to midswaps+120bp.

There was only one non-financial deal in the investment grade market. And any juice that was in the Atlantia (OpCo) deal was soon squeezed out, as the borrower issued €750m at midswaps+105bp in an 8-year maturity – some 20bp inside the initial guidance. Books were over €2.5bn. The monthly IG non-financial issuance has risen to a very respectable €25.35bn.

Elsewhere, we had €250m from SIXT Leasing (unrated, but likely X-Over credit) – where pricing was also tightened by 20bp. Retailer B&M issued a 5NC2 structure, in a high-yield deal for £250m.


News flow mixed, some care needed

The US earnings stream suggest some more difficulties ahead, especially after heavy machinery maker Caterpillar missed and indicated macro remains challenging. There were others. A big credit positive came from Fiat Chrysler which is seeking to cut its industrial debt by 50% this year as profits for the group rocket.

Italy didn’t get away with it all positively. With the constitutional court overnight clearing the way for elections sooner rather than later this year, there were the usual jitters around the bond market. Italian bond yields surged.

The 10-year BTP yield was up at 2.24% (+13bp) having got as high as 2.28% in the session, dragging Spanish yields higher to, the equivalent Bono yield up at 1.57% (+3bp, having been 7bp higher earlier).

As suggested above, President Trump and his Mexican counterpart were making the headlines, while the various stock market indices in the US were busy spending the session flirting with record highs, again.

The positioning around “the wall” however intensified as a meeting between the two Presidents was cancelled. Big news? We would think that this kind of posturing and the like is going to be a feature of this Presidency, although hopefully only in its early days.

US Treasuries were playing into the Trump reflation trade with the yield on the 10-year rising to 2.55% (+3bp) before dropping back to 2.50%, perhaps after market reflection on the US/Mexico meeting cancellation.

The 10-year Bund edged up to yield 0.48%, having touched 0.50% earlier.


Secondary credit ending on a high

Spreads moved tighter but in a limited session. The Markit iBoxx corporate bond index closed at B+132.2bp (-0.3bp and 4bp tighter this month) for euro IG credit, while the sterling index did much better in the session, tightening 0.75bp to G+148bp. The former index is now 4bp tighter this month, but the back-up in yields has seen the index yield up at 1.33%, or higher by 17bp this month. Returns sit at -0.6%.

The high yield market continued to outperform, spreads moving tighter amid just about zero liquidity, leaving the iBoxx index at B+371bp (-3bp) and some 32bp tighter in these opening weeks of January. The shorter-duration nature of the market and the relative stability of the front end of the underlying curve have served to deliver turns for the month to date of 0.85%. No one will be scoffing at that.

There are still several sessions to go before we close out the month, but it will take some for those returns to move much.

Finally, the synthetic iTraxx indices underperformed the cash market and closed with Main at 69.75bp (+1.75bp) and X-Over at 290bp (+4bp).

Have a good weekend, back on Monday.

Suki Mann

A 25-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.