31st January 2019

Big squeeze closes credit in January

MARKET CLOSE:
iTraxx Main

70.8bp, -2.6bp

iTraxx X-Over

320.9bp, -10.2bp

🇩🇪 10 Yr Bund

0.15%, -4bp

iBoxx Corp IG

B+160.2bp, -4.6bp

iBoxx Corp HY

B+488bp, -7bp

🇺🇸 10 Yr US T-Bond

2.64%, -5bp

🇬🇧 FTSE 100 6104.73, (+1.71%) 🇩🇪 DAX 13066.54, (+2.36%) 🇺🇸 S&P 500 3431.28, (+0.67%)

Solid month but choppy waters ahead…

Across all markets, January has been a good month in performance. Equities, commodities, rates and credit have all delivered surprisingly good returns. That’s not necessarily all good. It highlights a relief trade in equities after a damning 2018 where dovish policy keeps rates low and liquidity in plentiful supply. Macro worries keep the bid for rates well-supported and yields anchored while credit has slipped in there somewhere as a ‘hybrid alternative’. There were odd months in 2018 which played out the same way only to be swept away later by a tsunami-like weakness, where it really felt like a financial market crash was coming. We dare think 2019 will follow the same path. After all, the issues which troubled markets in 2018 are still with us now.

Anyway, let’s look on the bright side for the moment. We can be relieved that we have started the year so well, and have some performance booked which we can fall back on should it go awry anytime (as is likely going to be the case).

Equities have been in relatively good form. The Dax returned 5.9% in January, the FTSE struggled on currency strength and Brexit uncertainty but still managed to rise by around 3.7%. Over in the US, the S&P returned 7.9% and the Dow around 7%, as at the time of writing. Some of that was gathered on the back of expectations of a more dovish Fed and on a mixed earnings season, and the rest coming from hopes that the US/China will find a solution and/or will muddle through – all as growth slows.

Rates market investors have also had a good opening period. Eurozone government bonds have returned 1% (iBoxx index) in January supported by macro concerns and a more dovish central bank outlook. The economic news in the session had Eurozone growth in Q4 2018 stuck at 0.2% (Q3 also 0.2%) indicating that none of the expected recovery materialised and that the region is in a rut. The 10-year Bund yield might have popped as high as 0.26% earlier in January, but it is now back on a downward trajectory, currently at 0.15%.

Italy is in recession after recording -0.2% growth in Q4 following on from a 0.1% contraction in Q3. It’s not getting any better for Italy and there will be ramifications – conflict with EC – regarding the recent budget (for 2019). Stimulating the economy might be needed but we don’t believe that the EC will relent on the rules to allow the country a fiscal splurge, needed to try to aid some sort of recovery. In the meantime, it’s debt metrics are only going one way – further deterioration.

The weakness on the growth front isn’t temporary, and this is not just a soft patch. The incoming data – everywhere – points to the weaker economic environment extending for a good while yet. And as we have opined previously, a hard Brexit (no deal) will plunge the Eurozone region into even greater weakness. The EU has plenty of previous for making last-minute decisions, and if we are going to the wire regards the Withdrawal Agreement, then rates are going to be well-supported through the rest of the quarter at least.

After a fairly tragic 2018, credit has at least managed to stage a good recovery in January. IG spreads (iBoxx index) tightened by 12.5bp and the index returned 1.1% with most of the performance coming in the second half of the month. IG sterling corporates returned 2% with spreads 15bp tighter. In the higher beta sectors, the CoCo market benefited from just looking too cheap and the index tightened by 100bp whilst returning 3.5% in January. The high yield index also showed upside albeit a little more modestly in comparison, with 35bp of tightening in the index with returns of 2.1% for the month.


Primary markets disjointed in January

Sterling deal: Deutsche Telekom took £400m

In Primary, January was an excellent month in the end for IG non-financial issuance. We closed with €27bn of issuance, coming from 21 separate borrowers and 31 tranches. We closed the month with BMW lifting €3bn in a dual tranche (long 4-year and 10-year) effort with books up at a massive €10.5bn (priced at midswaps+65bp and midswaps+90bp, respectively).

That was the pattern for the month although, before BMW, the higher yielding IG deals were the ones which elicited the greatest interest. The sterling market also had a deal in the final session, with Deutsche Telekom getting £400m in the bag, at G+165bp for a 15-year maturity.

The level of demand allowed the German auto group to reduce final pricing by 20-30bp versus the initial price talk, in line with the trend we have seen for most deals throughout the month. Much to our surprise, it is the best January for many years for issuance, but we don’t think it is a harbinger of things to come. We still look for somewhere in the region €200bn for the full-year, versus €220bn in 2018.

Primary Issuance

HY Steady

In the high yield market, we had just four borrowers in the market in the month and two of those were blue-chip corporates, albeit from the periphery (TIM and EDP). We had just €2.8bn issued in the month versus €5bn in the corresponding month last year.

Inevitably, we are not going to get close to last year’s total (€62bn) given that we think the slowing economy is going to make it a little more difficult for borrowers to access the markets amid periods of market volatility. Still, we ought to be looking at around €45bn for the full year which is closer to the long-term average for this market.

High Yield IssuancewpDataTable with provided ID not found!

Seniors Heading South

The senior financial issuance market has had a fairly decent month, as it usually does with January nearly always the heaviest month of any year. However, we are anticipating a decline in issuance this year, to just €110bn – which would be another record low – after last year’s record low. The €17.5bn in issuance in January is the second-lowest level of issuance in the opening month in the last six years. It is all pointing to a low level of issuance for 2019.

Senior Issuance


Pulling in different directions

As for the month’s final session, the mood was sullied by those GDP reports. It’s not as if we didn’t expect them to be anything different. Chinese PMIs overnight added to the gloom, with the manufacturing still in contraction territory in January, while the German consumer reined in spending with December’s retail sales down 4.3% month on month.

The problem now, though, is that given the recent spate of poorer newsflow and a more dovish outlook from central banks (Fed and ECB), we can expect the weakness to persist – and even worsen. DowDuPont was the latest company highlighting such a situation, as it warned sales would slow during the current quarter.

Still, the Dax shot higher at the open and was some 130 points higher, before giving all that up and reversing hard to close in the red for the session. It was a very volatile final session of the month and, eventually, the index closed flat! The US markets were having a better time of it, probably on Trump’s comments that trade talks were going well, the S&P up 0.9% as at the time of writing.

In rates, the market went bid only. Yields fell hard. The 10-year Gilt closed to yield 1.22% (-3bp), the US Treasury 2.64% (-5bp) and the Bund just 0.15% (-4bp). The BTP closed unchanged to yield around 2.60%.

In synthetic credit, the iTraxx indices crunched lower and Main was left at 70.8bp (-2.6bp) while the X-Over index was down at 310.9bp (-10.2bp). Main was an incredible 18bp lower in the month and X-Over around 45bp.

For the cash market, we had a similar squeeze. Cash saw the iBoxx IG index close the month 12bp tighter at B+160bp (-4.6bp) and the high yield market at B+488bp (-7bp), with the CoCo market embracing a tightening in the month of some 100bp (index at B+610bp).

Have a good day.


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.