- by Suki Mann
iTraxx X-Over Index
10 Yr Bund
iBoxx Corp IG
iBoxx Corp HY Index
10 Yr US T-Bond
Credit coming up trumps
Another record week for equities, a back-up in market yields and credit spreads at their tights of the year; Sounds about right. It was a good week for risk assets, even if we saw moderate weakness in equities into its close.
The odds of a rate hike in the US next week rose to almost 100% and the government bond markets saw weakness into it. For credit, we finally have some traction with spreads tighter in every session and the iBoxx index is now a basis point tighter for this year. The iTraxx indices have also tightened markedly and this is suggestive that the feel good tone around credit might be sustainable. We might not see the same trend in tightening through the next few weeks, however, given that the French election season is gathering some momentum. And then there’s Trump.
The economy shows sustained signs of life
The Eurozone economy is going gangbusters as judged by the manufacturing and services PMIs at the end of last week, while there was scant sign of core inflation heading any higher – stubbornly stuck at less than 1%. Still, the speculation will intensify for the start of QE asset purchase tapering (before year-end?) as well as rate increases thereafter (in early 2018).
The UK economy, on the other hand, might have already had its day in the sun – if we assess the recent data and especially last week’s manufacturing and service sector PMIs. The UK is actually the one blot on the horizon, with the data suggesting that we’re heading for an economic slowdown while inflationary forces are gathering some momentum. There is no chance of a rate increase in the UK anytime soon.
The US is somewhere in the middle, data-wise, but has greater potential for seeing a more sustainable and higher level of growth than the Eurozone. The added bonus for the Eurozone is that any material pick-up in the US economy will benefit it (and the UK for that matter). Thus the global economy now has a good chance of recording decent levels of growth and the markets will react.
We’re likely going to get three rate hikes this year in the US, and the first of those most probably this month – Yellen suggested as much on Friday. The ECB will hold off until next year in terms of rates and asset tapering, in our view. The Bank of England isn’t going to do anything, given the aforementioned potential marked slowdown in growth, as well as the continued uncertainty around the Brexit negotiations to come.
The risks, though, seem clear and in that sense the markets will weather any ills which might come from them. Trump and his administration are top of the pile of concerns. But then, Dutch and French elections come a close second. Between now and mid-May might be a little choppy in the markets on occasions, but investors have always chosen to look on the bright side when assessing the event risk – relatively sailing through the Brexit referendum and the reality of President Trump. The earnings season is close to being done and dusted, but it was a decent one – with the banking sector (in particular) shining.
The markets are reacting
The US Treasury and Bund markets had a particularly difficult week of it. In just three sessions at the end of last week, we saw 10-year Bund yields rise from 0.20% to 0.35% while the US 10-year was back up at 2.50%. The brighter economic outlook in the two regions and the rate hike likely to come next week in the US were the main drivers. Yields of 0.40% and 2.60% for the 10-year Bund and Treasury, respectively, are in view but might need a push from the ECB later in the week. The tone and view of the world as he sees it will likely be the influencing factor – “he” being Draghi that is – on Thursday.
Elsewhere, OATs have recovered some of their weakness on election jitters and the spread with Bunds in the 10-year is at 60bp, having seen 88bp a week or so ago. This can move aggressively in either direction and we would not discount a jump back up to closer to 100bp. That figure is possibly just a couple of headlines away.
We closed Friday with just Nyrstar in high yield with a €400m, 7NC3 effort – and the first HY deal of the month, while Goldmans was in for €2bn in a 5.5NC4.5 floater structure. After a good ending on the issuance front for IG in February which made the numbers for the month look respectable, we opened March with three French borrowers claiming €3.25bn. The pipeline looks good, especially in HY, with many borrowers on the road and/or ready to pull the trigger.
We’re hopeful that the month will deliver some €30bn of non-financial issuance, albeit windows to print coming and going given the potential for some market turbulence from the various geopolitical situations we are faced with.
Generally though, the demand is excellent for new issues as evidenced by the seemingly increased tightening in pricing versus the initial guidance. Admittedly, many borrowers have faced little competition over the past month when they have come to market – while the lower the rating (in IG), the better the ability to tighten up the price. It seems like we’re chasing spread.
Secondary credit delivers finally
It’s been a while in the making but finally IG spreads, as measured by the broad cash Markit iBoxx index, saw investment grade spreads at the tightest levels of 2017. The index tightened to B+133.75bp (-1bp) as at the close last week. Equities might have retraced some of their stellar gains of Wednesday, and the government bond markets might be reacting to higher US interest rates, but the corporate bond market was left with good support. In fact, we tightened in every session last week.
The high yield market saw a 4bp tightening on the iBoxx cash index in Friday’s session (B+360bp), and is now some 53bp tighter in the year to date. The cash index was 18bp tighter last week alone. iTraxx Main was at 68.75bp (-1.25bp) and X-Over dropped to 269bp (-7bp) highlighting the more comfortable view the market has to credit risk at the moment.
This week is packed with events. We have the UK budget on Wednesday, the ECB get-together on Thursday and non-farms on Friday – all before we gear up for the Fed which follows next week.
Have a good day.
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