12th May 2017

Bubble

MARKET CLOSE:
FTSE 100
7,387, +1
DAX
12,711, -46
S&P 500
2,394, -5
iTraxx Main
62.4bp, +0.2bp
iTraxx X-Over Index
254.9bp, +2bp
10 Yr Bund
0.43%, unchanged
iBoxx Corp IG
B+114.3bp, -0.1bp 
iBoxx Corp HY Index
B+317.5bp, -3bp
10 Yr US T-Bond
2.39%, -2bp

Wishful thinking?

After a bright few days, the market seemed to stall; We are looking for reason to do something. But there was little by way of news flow to spur the markets into action. Somewhat amazingly, the Comey firing has failed to elicit any further (or any at all) market reaction. There’s a robustness in all markets and event-risk which would normally derail us – however little – isn’t, nor has it for a while now.

Still too much liquidity is chasing too few decent yielding assets and the low volatility period we find ourselves in is just leading to higher asset values. A bubble? Of course it is, but considered removal of the current accommodative policy might see it deflate without the usual devastating crash. Others would suggest that we know a crash is coming, it’s just that we have given up waiting for it!

We’re seeing rate markets only reluctantly give anything up, even amid clear signs that the recovery is becoming fairly well-embedded across the Eurozone. There is obviously some suspicion as to the quality and longevity of the recovery in the Eurozone. It helps also that inflation is at very low levels.

The same can’t be said of the UK where industrial production for March fell particularly sharply and made the BoE’s rate decision even easier. The UK economy is still up against it, as Brexit and election concerns continue to weigh on confidence, sentiment and investment. There was ‘no change’ from the Monetary Policy Committee.

In the credit markets, issuance levels fell sharply and secondary activity was also fairly limited – and it would be fair to assume that we will get the same again in today’s final session of the week. The tea leaves have it that spreads still have room to tighten up some more following a very good IG cash index tightening of 7bp this month so far. The high yield cash index is 96bp tighter this year and there is also a fair bit of tightening to go here especially if the high levels of expected supply does not materialise. Position for it. By the way, high yield returns now up at 3.3% YTD!


Primary’s shining light fades, again

€500m deal for Santander

After the excitement of Wednesday’s 4-tranche €8bn blockbuster offering from GE, yesterday saw just Paccar as the sole borrower in the IG non-financial corporate market. In an unspectacular deal off a 3x subscribed book, the high single-A rated issuer printed €500m in a 3-year at a paltry midswaps+15bp (-10bp inside the initial guidance).

The total for the month in IG non-financials has risen to €12.7bn to more than double what we achieved for the whole of April – but there is demand and room in the market to absorb another €15-20bn without having an adverse affect on secondary valuations, in our opinion.

Financial issuance was heavy again with another US bank printing a TLAC eligible deal as JP Morgan took €2bn in a 11NC10 structure. Mediobanca took €1bn in a 5-year floater format while Santander issued a 6NC5, €500m transaction. Investment holding group JAB Holdings took €1.5bn in a two-tranche 7-year and 11-year maturity offering with both tranches priced 15bp inside the initial talk.

The high yield market drew another blank, with just €340m being printed this month so far and likely acting as a boost to the secondary market valuations (tighter spreads).


The weeks just seem shorter

It would appear that most of the recent weeks’ activity is crammed into the period from Tuesday to Thursday. Because once again, we don’t expect much to get done in today’s final session of the week. Nevertheless, the coast is clear for a borrower to get some funding in unopposed and command the focus of all the investor base.

As for yesterday’s session, we failed to break out any of the narrow established ranges. While equities bourses were a sea of red, they were actually trading just a little lower between flat and -0.4% lower.

Government bonds didn’t do too much either, with the Bund unchanged to yield 0.43% in the 10-year and the OAT spread for this maturity at 45bp. Sterling was a little weaker on the UK rate decision while Gilts were a touch better (10-year yielding 1.16%).

As for the secondary corporate bond market, spreads inched better for choice amid low flows leaving the Markit iBoxx index at B+114.3bp – and another low for the year so far. The same was observed in the sterling market. In high yield, the index level dropped to B+317.5bp (-3bp) and the lowest level since 2007. We could argue that these levels are pretty much all time tights given the size of the high yield bond market in Europe now versus where it was in 2007. For index, Main closed unchanged at 62.4bp and X-Over a couple of basis points higher at 254.8bp.

Have a good 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.