24th June 2018

Batteries need recharging

MARKET CLOSE:
iTraxx Main

70.7bp, -0.3bp

iTraxx X-Over

305.5bp, -1.5bp

🇩🇪 10 Yr Bund

0.34%, +0.2bp

iBoxx Corp IG

B+128.3bp, +0.5bp

iBoxx Corp HY

B+391.5bp, +2bp

🇺🇸 10 Yr US T-Bond

2.89%, -1bp

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Markets lacking inspiration…

We might have closed out on the front foot, but that was another damp squib of a week to have traded through, with little really to give inspiration. It seems like that there have been too many of these weeks this year. It leaves us heading into the 6-8 week summer lull/break failing to get total returns for most risk assets classes into the black, year-to-date. It’s not been a great opening half of the year. We have had to contend with a high level of potential event risk over the past 2-3 years, and now we have moved a leg higher with the Trump agenda on import tariffs very likely set to plunge the global economy into a trade war.

The EU finds itself dragged into difficult situations such that it fights on several fronts taking in Brexit, US trade tariffs, the Italian political situation and dissent emerging from the Eastern European/Austrian block. It promises to be as difficult and uncertain a second half of the year as has been the first. The headline risks at a minimum will most likely stifle any material rallies. We’re already seeing some of the impact on the region, with data out at the end of last week highlighting the continued slowing of the manufacturing sector (in Germany and France).

In credit, we built up a head of excitement about the Bayer deal but they plumped for the majority of the €21bn equivalent of funding in dollars, and left relative slim pickings for euro-denominated corporate markets. Still, the €5bn, 4-tranche deal didn’t see a major follow through from other borrowers, with primary derailed some by the ongoing trade tiff between the US and China – and the US and EU (which saw tariffs slapped on €2.8bn worth of US imports on Friday).

The political situation in Italy is also back in the headlines as hard-line eurosceptics took control of some key budget/economic committees, but we don’t think this was a driver for the broader weakness and market apprehension through much of last week.

The new issue sector in Europe is the most important part of the market in European corporate credit. Unfortunately, primary IG non-financial issuance is running at around 30% lower than for the corresponding period last year (see below). Investor need and willingness is high as their portfolio cash positions are limit-long after facing such a reduced level of deals this year. Bayer’s deal last week solicited interest exceeding €22bn testified to that, although the borrower is a class blue chip operation and a relatively easy trade when thinking of where to park some money – instead of leaving it in cash (expensive) or in government bonds (also expensive).

The not so hidden subliminal message is that the market needs deals – and plenty of them.


Still beating the drum for credit

Primary drew an unlikely blank on Friday and we are left with this week in which to get the final bit of business in before we close out the first half. June has threatened at times to be a much busier month, but less than €20bn has been issued from IG non-financial rated corporates versus €35bn for June 2017. For the year so far, it is €114bn against €265bn for the whole of 2017 – and we know that July and August are not going to be busy.

Therefore, the technical supportive backdrop should allow for secondary to hold relatively firm, but we know it doesn’t. There is cash to put to work but an extremely reluctant investor base is unwilling to chase much risk in secondary, preferring the comfort of adding through primary (because everyone else is). The fundamental backdrop is also supportive and ought to allow much comfort to investors to add risk knowing that at least they’re going to get paid back. But alas, that’s not enough anymore (usually never has been).

So while the ECB is still lifting over €1bn per week, primary is simply not delivering and we have technical and fundamental situations which ought to see us tighter, the corporate bond market finds itself in some sort of no-mans-land. Fearful of a major pullback should a systemic crisis develop, but also failing to see where or why any upside in spreads should come. We’ve long had a positive stance and we think that with the trade war likely to erupt, the corporate bond market will fare relatively well against, say, equities while the lure of cash (staying in government bonds, for example) just isn’t attractive at all (too expensive).


Potentially difficult week ahead

If it smells like one, looks like one and feels like one.. it probably is one. We are in trade war territory. Another uncertain week beckons, because Trump’s tweet at the end of last week, threatening (we think) 20% tax on imports on autos is going to ruffle the markets. His tweets are usually a precursor to the administration’s policy, so we can expect some material headline risks. That means it will be difficult for any market to rally apart from rates where a safe-haven bid will likely keep current cash levels supported.

We also have the EU summit where immigration promises to dominate and the Italian’s and Eastern European countries will be looking for some collective support in their endeavours to control the situation. Brexit will likely take a back seat and we will be closely watching the EU’s response to that Trump tweet on the potential for auto import tariffs (of 20%). We also have US GDP and inflation data.

So we closed last week with the US Treasury yield at 2.89% (-1bp, 10-year) and the Bund yield at 0.34% (+2bp), the latter popping out of its previously established 0.40 – 0.60% range. Equities were in positive territory in the final session, but lacking any real zest (up by around 0.3%) apart from the FTSE which was a huge outlier, up 1.7%.

In credit, iTraxx Main closed at 70.7bp and X-Over at 305.5bp, just 0.3bp and 1.5bp tighter, respectively and pretty much reflecting the sense of apprehension seen in equities.

Cash didn’t do too much either, the iBoxx IG index up at 128.3bp (+0.5bp) leaving it 4bp wider in the week – although it is still 4bp tighter still this month, following a difficult last week of May which had the markets generally recoil. In sterling, we closed the session and week unchanged with the iBoxx cash index at G+154bp – and took in flurry of deals, and that is still 6bp tighter in the month!

As for the high yield market, it also did very little with the index up 2bp at B+391.5bp. That level leaves the index 17bp wider in the week, but still 3bp tighter for the month while the rally in the front-end of the underlying has total returns in the black month-to-date.

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.