27th April 2017

Bleary eyed

FTSE 100
7,289, +13
12,473, +6
S&P 500
2,387, -2
iTraxx Main
67bp, +0.7bp
iTraxx X-Over Index
269.4bp, +3.4bp
10 Yr Bund
0.36%, -2bp
iBoxx Corp IG
B+123bp, -0.5bp 
iBoxx Corp HY Index
B+348.8bp, -1bp
10 Yr US T-Bond
2.30%, -2bp

Back to black

Normal business is resumed. The was no more rally anywhere for risk assets, but rather calm and directionless markets. The markets need a heads-up before they can go on. We might get another major jump in a couple of weeks, but until then we think it’s all about holding in rangebound fashion, clipping the month’s performance into this weekend and then hoping for no major hiccups as far as the French election situation is concerned.

€300m deal: Brussels Airport Company

That is, the financial markets are pinning all of their hopes – for Q2’s performance or otherwise – on a Macron win and the status quo being unchanged – because that is what will happen given the likely lack of a parliamentary consensus in France.

In credit, we had a deal! The first in IG non-financials as the triple-B rated Brussels Airports Company lifted a sub-benchmark sized €300m. These are very slim pickings indeed. The other deal of note – for different reasons though, was a blockbuster from Netflix for an increased €1.3bn, 10-year maturity effort to yield 3.75%.

Not quite a feast as far as primary markets are concerned, but the first scraps of offerings from the non-financial sector were evident. We can only hope the market continues to thaw through next week, but it will only be a slow burn in primary. The French election the following weekend will hopefully allow for the sluice gates top open for a heavier level of supply in May and June. The tally has risen to just €5.6bn for IG non-financials. In the high yield market, we followed up that huge Netflix offering with a sizeable deal from French cleaning services group La Financiere Atalian for €625m.

These deals now see April’s supply total up at €5.25bn. More high yield issuance in the month than investment grade? It’s not impossible but would be a first of it were to be the case! For us, the Netflix deal is an interesting one given that the company barely generates any free cash to service its debt (rated B1/B+) – but has great name recognition, and a decent amount of yield to entice investors. Buy in haste…

Trump making waves again

President Trump’s tax reform agenda was aired after the European markets closed and market expectations were largely me. It was confirmed that the government would be looking to slash the top rate of corporation tax to 15% (from 35-40% currently), as well as simplify the system with reduced individual tax brackets. There was intense speculation beforehand that the repatriation of foreign earnings would be taxed at a low 10% rate (no word as at the time of writing). The news was seemingly in the market as judged by the reaction to the news.

There are many procedural hurdles to overcome before any policy implementation is possible and we will be unlikely to see any (aggressive) proposed changes get through this year (if at all). Still, the expectations (or hopes) of eventual success have kept US equities on the up this week – and the Nasdaq notably, through the 6,000 level for the first time.

Away from Trump, the US earnings season is mixed although mostly (as usual) corporates have beaten expectations.

Markets play out in a no man’s land

As we have suggested in the previous notes this week, the euphoria around the French election has now duly subsided as markets had reset and are trading off their new levels. There was some profit-taking but more, we’re looking for the next catalyst to provoke a meaningful move. Trump’s tax reform might be it for some in the near term, but there’s little aside from that. At least there is no hangover after the huge rally seen in just about all risk asset classes. The markets have thus far managed it well.

Bunds were slightly better bid following a quite ferocious sell-off leaving the 10-year yield to hold at around 0.36% (-2bp), while the inevitable musings around a Le Pen victory introduced some hesitancy into OATs leaving yields there a basis point higher at 0.83% as the push lower (in yield), higher (in price) came to a halt. Similarly, US 10-year Treasury yields also edged lower, just a couple of basis points to 2.30% while those for the equivalent Gilt were unchanged at 1.09%.

And finally, in the credit markets, we outperformed. There’s a better feel to the market all of a sudden, and we think that the lack of supply is now becoming a contributing factor to the spread tightening – especially after the Markit iBoxx IG index managed a 1.5bp of performance whilst equities were directionless (usually a good indicator for spread movement). The index is now at its lowest level of the year at B+123bp (-8bp since the french vote) – and finally giving us the sort of level we would have expected given the heavy lifting of the market by the ECB.

The sterling market edged tighter too (-1bp) and the index is now where is started at the beginning of the year at B+149.8bp.

For once, the high yield market didn’t move much, the index lower by a basis point at B+348.8bp with investors totally focused on the two big deals in the market. And the iTraxx indices edged higher for the first time this week leaving Main at 67bp (+0.7bp) and X-Over at 269.4bp (+3.4bp). It’s the ECB up next, which means the activity is up for this week and month.

Have a good day.

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

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.