11th June 2017

Everything is priced in!

MARKET CLOSE:
iTraxx Main

58.8bp, -1.2bp

iTraxx X-Over

240.5bp, -5bp

10 Yr Bund

0.26%, unchanged

iBoxx Corp IG

B+119.2bp, unchanged

iBoxx Corp HY

B+317.1bp, -0.3bp

10 Yr US T-Bond

2.20%, +1bp

FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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She’s no Maggie, is May

Let’s get one thing out of the way – the shock UK election result of last week is no deal-breaker for the sterling corporate bond market. Nor is it for the UK economy. For some, they will wheel out the old cliché about markets hating uncertainty and feel that it has never been more appropriate. And they will hammer home how we now have that uncertainty by the bucket load in the UK.

Admittedly, the political regime has unravelled as Theresa May’s election gamble spectacularly backfired. The opening salvo already has some fretting about how this might play out for the UK economy. There could also be serious implications as far as the next step of the Brexit process is concerned and the negotiations themselves.

With no stable government (?) the impact on the Brexit negotiations is potentially going to be immense in terms of timing and the make up of any deal, but it might also be the undoing of a hard Brexit axis possibly leaning towards a softer dynamic. The hung parliament – with little chance of cooperation between the parties after the recriminations following the last one in 2010-2015 puts much into doubt – the DUP the likely bedfellows for the Tories.

To be fair, there is now the prospect of more elections which could well take in another Brexit referendum, most likely another UK general election in the Autumn – but we doubt another Scottish referendum. Further sterling weakness (or the currency staying weak for a while longer) will be good for manufacturing/exporters, will boost equities (they will be cheaper for foreign buyers) and doesn’t necessarily have an impact on the corporate bond market. Interest rates are going to stay low – and for much longer while the political uncertainty exists – in order to stabilise financial conditions.

We dare say we can expect the obligatory defensive market stance (by the Street) and some weakness in spreads on the follow. But that will come amid little volume being traded and we expect the market will settle quickly. Sterling corporate markets have been an out-performer this year in fixed income and the index (Markit iBoxx) has returned 4% so far this year. This compares with just 1% in the euro-denominated IG markets and 3.7% in euro high yield. So for the UK, the news and attention will all be about politics.

For everyone else, we focus on macro and the prevailing data streams, Trump and the event risk which he throws off, and this week’s FOMC!


Everyone panicked, except the markets

Just look at this array of government bond and equity market data: Yields on 10-year Gilts 1.01% (-2bp), Bunds 0.26% (unchanged), OATs 0.65% (-2bp), Italian BTPs 2.08% (-10bp) and Spain’s Bonos 1.44% (-4bp) – all Friday’s action. Also, the FTSE moved up 1%, the DAX +0.75%, while the S&P and Nasdaq saw fresh intraday records in the session – closed lower though, led by a huge technology sell-off.

And yet another albeit unlikely event – a situation which could well have and/or ought to have derailed the markets has been swatted aside. Even Comey’s Senate Committee testimony failed to have a negative impact on the markets. Everything is priced in! We would think that only a full blown financial crisis is going to derail the markets. Politics won’t.

So we’ve thrown everything in terms of event-risk at it, but on we go as the risk assets rally maintains it’s momentum. It really is the economy that matters. It’s therefore not too difficult to conclude that the risk asset rally has legs in it it. Just at the end of last week, into that rally in stocks amid stability in safe-havens, the cost to insure credit risk also dropped to fresh multi-year lows as confidence in macro and credit rose. iTraxx Main was lower at 58.8bp (-1.2bp) and X-Over to 240.5bp (-5bp)!

Cash credit markets were a little dumbstruck in comparison. There was no issuance on Friday, and so it was another chance to consolidate and absorb the AT&T and Volkswagen deals (€10.5bn printed between them). That meant we closed the session unchanged, strangely failing even to tighten into those charging European equity markets.

The Markit iBoxx IG corporate cash was left unchanged at B+119.2bp, while just a better bid for choice in the high yield market saw that index at a new record low of B+317.1bp (only -0.3bp).

We’re sure that both of these indices – markets rather – will see more tightening over the next few months and we would continue to run with a higher than index beta positioning to reflect the ongoing investor trend for yieldier product.

On the primary front, the numbers were flattered by the AT&T and VW deals last week, taking the monthly tally to €11.8bn for IG non-financial issuance – from just five borrowers. The FOMC side, we should be looking for a fairly good week in primary especially as we are aware that the pipeline is in good shape in both IG and HY.


FOMC to dominate this week

It is that time of the month again, and the FOMC meeting -which is, for once, a useful distraction. The upcoming meeting will dominate events. The market has priced in a 25bp hike – even after accounting for the recent weakness in US growth – but as ever, we will be looking for clue as to the timing of the next one (this year?).

So, expect a quiet session for Wednesday when the decision is articulated to the markets after our close. In the UK, we have the BoE’s monetary policy committee meeting, and here we can expect no surprises. That is, no change. After all, with politics in some disarray in the UK, it’s a nailed-on certainty that they won’t be rocking the boat any further.

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.