26th April 2017

Catching one’s breath

FTSE 100
7,276, +11
12,467, +12
S&P 500
2,389, +14
iTraxx Main
66.3bp, -1.7bp
iTraxx X-Over Index
266bp, -6.5bp
10 Yr Bund
0.38%, +4bp
iBoxx Corp IG
B+124.5bp, -1.5bp 
iBoxx Corp HY Index
B+349.6bp, -5bp
10 Yr US T-Bond
2.33%, +5bp

Calm transcends the markets

We had more of the same in the session, but less …. a lot less. The euphoric market response to the first round result of the French election failed to elicit much of a follow-through into yesterday’s session, which was to be expected. However, we have a new base from which to trade-off and, as we suggested previously, small up and downs from here into the final round on May 7, and then through the UK election in June is probably the best we should hope for.

Still, we’re a little perturbed by the lack of issuance in euros from the investment grade non-financial corporate sector. We’re six straight sessions now without a deal, amid bullish markets overall and demand for new issues at elevated levels. Some of it is explained away by the earnings season (blackout periods), but just €5.3bn this month makes this the lowest April ever for issuance from this category of the market.

There was still a positive tone around equities in yesterday’s session and we even had the DAX set a new record in it. We were never going to rally as hard as the previous session without a clear catalyst to promote it. Still, the positive bias fed through into the equity markets allowing for cash to squeeze some more and the iTraxx indices again outperforming with a decent drop in the cost of protection levels. Overall, there is a feeling that geopolitics are becoming a little more ‘user-friendly’, and a Macron win with an increased majority for Prime Minister may are now factored into the market. In a way, we can move on to the evolving situation around North Korea and some concerns as to how events are unfolding there might start to impact the market.

And there is little that we should take for granted. Trump’s unpredictability is not necessarily easy to trade. We would think that any volatility will be felt as usual in equities, there might be a bid for safe-havens again and an illiquid cash credit market will hold firm or edge wider into any significant risk asset weakness. For now, with just three sessions to go before we close out the month, credit spreads are significantly tighter and corporate bond fund returns are in positive territory; while planning for next month likely means running with current investment policies.

That means staying with a portfolio beta in excess of 1.0, with a bias for slightly longer duration positioning and staying firmly with lower rated corporate bond issues. Financials (especially subordinated) seems a reasonable overweight holding versus index given the potential for recovery dynamics in macro amid healthier banking sector fundamentals.

Primary still limp

€1.5bn deal: Credit Agricole

As mentioned above, primary again failed to deliver for corporate bond investors. This is some famine they find themselves in. Investment grade issuance has been stuck at €5.3bn for almost two weeks now while non-financial HY rated borrowers have managed to take €3,345m of cash. the one area which has been upbeat has been the senior banking sector.

Credit Agricole added €1.5bn in a 10-year maturity deal to the pot yesterday – and lopped 13bp from the initial guidance for their troubles, taking the monthly level of issuance to €13.7bn.

The other deals of note came via a dual-tranche offering from Thames Water in sterling, for a combined £550m in 6-year and 10-year maturities and we finished up with a £150m tap from Phoenix Group for the high yield market.

Safe-havens in retreat

Elsewhere in fixed income, it was a case of retreating some more for safe-havens as yields moved higher again – and OATs were not spared. In fact, OATs actually under-performed with yields on the 10-year rising to 0.83% (+6bp) and the spread versus Bunds to 45bp. Gilts sold off, too, leaving the 10-year to yield 1.09%. Sharply higher US stocks – the NASDAQ through 6,000 for the first time ever – saw to it that US Treasuries would be in less demand and the 10-year moved t0 yield 2.30% (+3bp). Those sharply higher stocks was confined only to the US markets with the various indices higher by up to 1%.

As for the corporate bond market, the Street took every opportunity to tighten up the market. The Markit iBoxx IG index, which is a measure of how the broad market looks, was lower again at B+124.5bp – but only by 1.5bp after that 6bp tightening on Monday. Still, the omens are good and after that solid close int he US stock market overnight, we’re likely set to tighten up some more today. After all, there is a scarcity of secondary market liquidity and the lack of supply is also likely combining to keep spread markets upbeat. The similar sterling IG index was a basis point better.

In high yield, following an incredible 18bp cash index tightening on Monday, Tuesday saw a more sober 5bp tightening gin the index which is still a massive move for this market/index. As with IG, there is more to go in today’s session we think.

Finally, the iTraxx indices moved lower again with Main down at 66.3bp (-1.7bp) and X-Over protection dropping to 266bp (-6.5bp).

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.