21st April 2017

Bon courage

FTSE 100
7,117, +3
12,026, +10
S&P 500
2,357, +18
iTraxx Main
74.75bp, -1.25bp
iTraxx X-Over Index
291.5bp, -3.5bp
10 Yr Bund
0.24%, +3bp
iBoxx Corp IG
B+131.3bp, -0.8bp 
iBoxx Corp HY Index
B+373.5bp, -3bp
10 Yr US T-Bond
2.24%, +4bp

Where have they all gone?

We keep hoping, but there has not been a single euro-denominated IG non-financial corporate deal this week, with just today’s session left in which to break that duck. That sort of statistic is normally the preserve of crisis-era dynamics. We’re far from it, while many would agree that macro at least is actually on the front foot.

In that sense, the ECB’s QE corporate bond buying programme has failed in its objective of loosening (oiling) the transmission mechanism for higher levels of capital markets borrowing; Spreads have barely tightened, costs haven’t dropped more than they did since before the QE – and supply has not noticeably picked up in the past year. The current run rate is at average levels of annual issuance when looking at the last 5 years.

The difficult start to last year saw low levels of issuance but then a sterling recovery with the opening 4 months of the year seeing €104bn of supply, which then saw the year-end up with a near record €271bn of issuance. In 2015, we kicked-off at a blistering pace with the January-April period delivering €135bn in IG non-financial supply with the year as a whole at €264bn. We have exceeded €250bn of non-financial issuance in each of the last 4 years.

So there is little to fall back on in terms of obvious trends that might point us to thinking how the year as a whole might turn out. There are seasonality factors to take into account (July-Aug and December being quieter months), but this time the outlook is blurred by the elections in France this weekend and in two weeks (second round), the UK election in June and then the German one in September. Italian voters are also due to go to the polls. Then there’s the small matter around Trump and the various evolving geopolitical situations.

So far, the January to mid-April period has seen issuance in IG at €94bn, with less than €6bn of that coming this month so far.

It’s tight at the top

There’s a 4-way race as far as the first round of the French elections are concerned with Fillon, Melanchon, Le Pen and Macron all polling in a 4-point range of each other. There are plenty of undecideds and there could yet be surprises or not as the case might be. A ‘market friendly’ result will be a Macron/Fillon victory; the least market friendly one would be a Le Pen/Melanchon victory. Any other combination likely sees the ‘safe’ candidate winning the second round in a better-the-devil-you-know outcome, we would think. For sure, it’s one of the most exciting French elections that we can remember.

A ‘back of the envelope’ scenario analysis highlights perhaps why the markets have been very circumspect and wary over the past week or so. Few have probably wanted to take any additional risk into to. Credit market investors will have probably wanted to preserve their current (healthy) cash balances, although we continue to think deals would have got away well this week. This means that as early as Monday, if we have Macron/Fillon shoot-out, the sluice gates could well open on the primary front. OATs will rally, the euro might too and the CAC would see much relief too (higher).

A Le Pen/Melanchon play-off, and we see the reverse – euro weakness, lower stocks, higher OAT yields while the Bund rallies and credit probably only edges wider. Single name French corporates nevertheless go wider in cash and their CDS levels higher amid better buying interest for protection against French risk positions.

BoE will complete purchases – next week

The BoE bond purchase programme totalled £9.74bn as at the close of business on Wednesday. Their intended target was £10bn over an 18-month period, so a £260m lift by the end of next week sees them achieve their original target in 7-months (which is 11-months earlier than anticipated). How easy was that? Anyway, the QE programme did clearly stir the primary markets (which is more than what we can say for the euro markets), but the big question remains as to whether the programme will be extended beyond £10bn.

We don’t believe that corporates have problems with accessing the sterling corporate bond markets, so it hadn’t ought to be extended for that reason. But there is a question mark over how much spreads in secondary have been supported by the BoE’s participation. We’re soon to find out.

Unilabs: €250m HY deal

We had a couple of borrowers in the market with the week’s first HY deal coming from Unilabs in a €250m effort (to be priced) and taking the monthly total so far to €2,945m. The year to date total is up at €19,345m and on course for €45bn for the full-year which would be the fourth year in a row we’ve exceeded that level. The other deals came from B of A which took senior funding in a dual tranche offering for €3bn.

For the rest, it was a better session for risk assets although they weren’t flying following a couple of sessions in the doldrums. That meant equities were generally in the black, with the US markets outperforming. Macro in the US suggested factory orders have cooled this month and jobless claims rose a little. Earnings are generally beating (as expected) although Philip Morris was a notable miss.

Bund yields yielded some more, up at 0.24% for the 10-year while OATs called to yield 0.86% in the same maturity – the 62bp spread between them reflecting market positioning for a Fillon/Macron play off in the second round.

In credit, we went along with the better tone. Looking at the broad market as a whole, as measured through the Markit iBoxx index, the IG sector was marked at B+131.3bp (-0.8bp) and after two better sessions, we’re back to flat for the week. The sterling market closed completely unchanged – reflecting the lack of secondary activity during the session, in this very small corporate bond sector.

At G+153.8bp, the sterling cash index is a basis point wider YTD and 3bp wider since the BoE’s QE operation began at the end of September 2016.

In high yield, the same. Spreads inched tighter such that the index was down at B+373.5bp (-3bp) – and that’s 7bp lower this week. The indices closed at 74.5bp for Main (-1.25bp) and 291.5 (-3.5bp) for X-Over.

Make the most of a restful weekend!

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.