17th October 2017

Credit strikes out

MARKET CLOSE:
iTraxx Main

54.9bp, -0.6bp

iTraxx X-Over

241.1bp, -1.1bp

10 Yr Bund

0.37%, unchanged

iBoxx Corp IG

B+104.3bp, -0.4bp

iBoxx Corp HY

B+271.5bp, -3bp

10 Yr US T-Bond

2.31%, unchanged

FTSE 100 , DAX , S&P 500 ,

A bit of this and a bit of that…

It is not often that we have a day where prices for most asset classes trade in the narrowest of ranges, and never really threaten to break out of them. Tuesday was just like that. Mind, there wasn’t too much in terms of news flow in the session to get either excited about – or overly concerned. We would think that the path of least resistance is still likely going to see risk asset prices go higher, in the short term anyway. The data generally remains positive and it does seem like the global economy is in a recovery phase which might just last through 2018.

Geopolitics are our enemy at the moment representing a clear and present danger to the financial markets with several situations brewing. So far, we’ve been resolute enough to ignore them – or pay little attention to them – because the financial system is still so flush with liquidity, that cash needs a home. It might be different when the tap is turned off and liquidity drained away.

So while there was little really going on, anywhere, the credit market managed something to chew on. We had a couple of utility borrowers open the account for this week’s non-financial IG issuance alongside an upsized high yield deal which was finally priced. The first of those were from Italy’s Iren which raised €500m in a 5x subscribed deal in a 10-year maturity Green bond at midswaps+85bp – which equated to 25bp inside the initial price talk. The deal was followed with a dual-tranche from the Netherland’s based Stedin which took €300m in a 5-year floating format at Euribor+27bp (-13bp versus IPT) and €500m in an 8-year transaction priced at midswaps+30bp, 20bp inside the opening guidance.

That €1.3bn of issuance took the monthly total to a paltry €8bn and unless we get another €8bn by month-end, then this will be the lowest October level of supply since 2014. The way it all looks at the moment, it might be too much of an ask to expect that we get that €8bn.

In high yield, CMA CGM was back for the second time this year for €500m in a 7NC3 structure which was priced to yield 5.25%. That’s a very good €4.4bn from the high yield market this month, and takes the annual total thus far to €52.6bn. We are now just €4.4bn shy of the record level seen for any given year (which was €57bn in 2014). The only other deal of note in the session was from Coventry Building Society for £450m in a 6-year maturity.


All up in the air in the UK

A particularly downbeat report from the OECD on the UK economy – should the UK leave the EU – seemed to be the main driver for the rally in Gilts. The economic think tank even stated the obvious in suggesting that the UK should try to forge the closest possible relationship with the EU! September’s inflation rate at 3% was the highest for five years and will have many debating as to whether the rate has now peaked, whether the OECD is (finally) going to get a forecast right and if so, whether we are now odds on certain to have a rate hike next time around. BoE governor Carney was on the tapes doing his best, it seemed, to cool immediate rate rise speculation.

Gilts rallied hard with the 10-year yield dropping to 1.27% (-7bp). That will keep a few total return investors happy after having seen their corporate bond portfolio performance ravaged in August/Spetember after the Gilt market sell-off.

Other news had Goldmans and Morgan Stanley both beat expectations on third quarter earnings releases as did Johnson & Johnson, there was much comment and debate on the latest round of Brexit talks while the Spanish were busy downgrading their own growth forecasts in light of the uncertainties created around the Catalonian political/secession risks.


Grinding it out

We would not describe the market’s inability to move much better in the session as a ‘struggle’. Far from it. US stocks are at around record highs plus or minus a few points (the Dow set another intraday record), Asia stocks are at 10-year highs and even the DAX is only 30 or so points short of its record high. Credit spreads are at or close to record tights and it is fair to assume we are unlikely going to ratchet better into the foreseeable future. There is for sure some caution amongst investors in all asset classes. The only investor throwing that caution to the wind is the ECB, as it continues to amass €60bn of debt obligations across various asset classes every month.

As mentioned above, we were left mixed in equities in Europe just as they were in the US, but mostly the moves were too small to matter. The joy for some came from the Dow breaking through 23,000 for the first time in its history during the session, although it closed below the figure.

Rate markets apart from Gilts closed the session unchanged for the most part. In credit, the synthetic indices edged lower as the cost for credit protection fell. main was down at 54.9bp (-0.6bp) and X-Over at 241.1bp (-1.1bp).

A quiet session in secondary cash nevertheless saw the Markit iBoxx IG cash index tighten by 0.4bp to B+104.3bp and the index yield to 0.98%, the lowest level since October last year. The bid was there though, or at least a confidence in the Street to be less accommodative on the provision of liquidity. The CoCo index spread tightened to 422bp (-4bp, 20bp off the record low) and the yield to a new low of 3.86%. Returns? 14.4%!

Scary stuff in the high yield market as well. The index spread tightened to a new, clear record low of B+271.5bp (-3bp) – as did the index yield to 2.50% and returns to the year to date at 6.2%!

Have a good day.


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

Suki Mann

A 30+ 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 CreditMarketDaily.com.