13th February 2017

Beggar-thy-neighbour

MARKET CLOSE:
FTSE 100
7,259, +29
DAX
11,667, +24
S&P 500
2,316, +8
iTraxx Main
74bp, unchanged
iTraxx X-Over Index
291bp, unchanged
10 Yr Bund
0.32%, +1bp
iBoxx Corp IG
B+136.5bp, -0.5bp 
iBoxx Corp HY Index
B+380bp, -2.5bp
10 Yr US T-Bond
2.41%, unchanged

Looking after number one…

Saved by the half-term school break! However, we have so much to ponder during it. Top of the list is the US corporation tax break news. It is coming – likely sometime next week, and it is already delighting equity markets (record highs in the US for the S&P, Dow and NASDAQ) given that President Trump has suggested the phenomenal nature of them.

A reduction the overall tax rate is due, but that repatriation of foreign earnings with a low or no penal tax rate – so long a bugbear for many previous US administrations – could unleash a massive US domestic investment spending spree.

There is after all, well over $1trn of foreign earnings tucked away offshore. There will be strings attached, but that movement of cash back onshore alone – if it finds its way back into an industrial investment splurge over the next several years – could have one thinking that on economic policy, he will have delivered.

And there is much news flow around what the rest of the new regime’s protectionist policies will have on global growth, existing debt burdens, the servicing of those debt loads and so forth – that many are running scared. The unpredictably of the new administration’s policy regime has many a seasoned politician flummoxed and panicked (in Europe too), and a whole host of economic and geopolitical commentators bewildered.

As for the markets, we would think that they ought to be riddled with immense volatility – that is, choppy stocks and a better bid for safe-haven risk as we revert to type when uncertainty engulfs us. But, no- Because the US stock markets in particular are thinking a lower tax burden is good for growth and therefore corporate earnings. As they push higher, government bond markets ought to yield. But such is the event risk that comes with that potential US economic policy that we are left with a proportionate bid for government bonds.

Credit lies somewhere in the middle. Higher growth/earnings is good for credit metrics. Higher equities is good for the highest beta of corporate bond risk (strong correlation). However, if the bid for government bonds if predicated on fear/event risk it will offer little or nothing for the corporate bond market, but lower yields ought to elicit some support for this higher yielding fixed income asset class. So, credit spreads should grind tighter only.


Primary to stutter some more…

With it being half-term school holidays this week, it’s fair to expect that primary isn’t exactly going to be bursting with activity. Non-financial IG issuance this month so far comes in at a paltry €3.5bn and, if we get that again next week, we will both be surprised and almost exuberant.

We’re fighting against getting issuance away amid some potentially serious headwinds from all the political event-risk, while the earnings season might have prevented a few borrowers from pulling the trigger. For the month as a whole, €15bn looks like the best we might get.

Funding ahead of the French elections has become bit of a theme. Could March therefore be a heavy month? Well, first off, we will probably need market conditions to be accommodative. Then we will need to have borrowers who are not in the blackout period to be the ones who are looking to get some funding in. If some borrowers have delayed plans to issue this month, then they could well decide to get it all done next month. We think it is a risky strategy because windows can open and close very quickly.

The high yield market is a little less immune to the event risk, given the more natural built-in buffer (from higher spread/yield) issues have, and we do need markets to be confident. HY issuance this month has come in at €2.15bn so far and last week saw some testy PIK deals (and for size). The pipeline of deals is also quite considerable and we do look for some decent levels of supply over the coming weeks as the many issuer roadshows come to a close.


Credit treads water

Corporate bond spreads ended the week wider, amid little supply, continued ECB lifting of the market but limited investor interest. The drift wider left the Markit iBoxx IG non-financial index 2.5bp higher in the week but that was after a 0.5bp tightening seen on Friday, leaving the index at B+136.5bp. And that’s about 2bp wider this year. The sterling market has pretty much mirrored the moves, the index at G+152.8bp as we closed out.

In the HY market, the cash index is at B+380bp, reflecting a tightening of 2.5bp on Friday but a small widening of 5bp for last week. The index is now around 10bp versus the low of this year – but still 33bp tighter ytd. We’ve had supply, but the €1bn or so of PIK notes appeal less to the “traditional, plain vanilla” HY investor, and in themselves are unlikely to put pressure on secondary valuations.

HY credit is, overall, having a good time of it. Not just are spreads tighter by some considerable margin, but returns are up at 1% for the year so far, while IG returns are -0.15% in the same period.

Coming up: Yellen’s Humphrey-Hawkins testimony

The iTraxx indices closed unchanged for the session with Main at 74bp and X-Over at 294bp. On economics alone, these indices ought to be much lower, but uncertainty and perhaps fear of what the White House’s new resident might do next keeps protection better bid.

For this week, quieter markets ought to move in either direction in very small ranges but, as ever, we have event risk to contend with and it is no longer economic.

On that front, we have Yellen’s Humphrey-Hawkins testimony, US PPI and CPI data as well as industrial production numbers for January. The US earnings season enters the final stages of its season, while we see European corporates stepping in.

That’s it from us. Back tomorrow.

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.