30th May 2017

Excitement building (for some)

iTraxx Main

62.3bp, +0.7bp

iTraxx X-Over

251.9bp, +1.9bp

10 Yr Bund

0.30%, unchanged

iBoxx Corp IG

B-+119.5bp, +0.4bp

iBoxx Corp HY

B-+325bp, +4bp

10 Yr US T-Bond

2.22%, -3bp

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Method in the madness no more…

Just after the ECB’s overall bond purchases fell by 25% per month, we saw a corresponding drop in the weekly corporate bond purchases from a long-term average of €1.75bn to a weekly average through April of around €1.3bn. So far, so good, and it made sense from a proportionality perspective.

However, throughout May those purchases of corporate bonds have increased again and the weekly accumulations have exceeded €2bn for each of the last two weeks. More corporate bonds to replace the scarcity of government debt which fits in the parameters of the remit they have? Most likely. But there ought to be greater consequences for corporate bond markets.

€550m primary deal: French retailer, Casino

That higher level of debt accumulation by the ECB should be a good sign for secondary market valuations, if they are sustained. We would think that they go some way in explaining away the lack of intraday/daily volatility we observe in the corporate bond market. It also goes some way in offering reason as to why the HY market is in such good form. The crowding-out effect in IG is now likely biting a little harder and we are seeing a more material bias for all kinds of higher yielding debt from investors.

Yield matters, given the stubbornness in the rate market to push yields higher there. And so we’re finding it in “high yield” markets and ‘higher yielding products”, like low rated IG corporate bonds (CoCos, for example).

But we should also be thinking in terms of a greater squeeze on secondary market spreads. We don’t see that. Offered side liquidity, Street inventory and so on ought to promote a consistent and steady tightening trend. This is a technical aspect of the market which has been in place for a year now (since the ECB ploughed in), but we’ve only tightened in line with improving macro.

That is, better economic conditions promoting improved corporate credit fundamentals and a tightening in spreads from B+150bp (area) to B+120bp (Markit iBoxx). There is nothing special in that and it is more confusing when one thinks in terms of the near €90bn of IG debt that the central bank has lifted (almost 15% of the eligible market).

It might all come, eventually. And we would prefer to stay long, and confident that spreads will continue edging tighter, for choice, and hold our bias towards a clear higher beta risk positioning.

ECB weekly corporate bond purchases exceed €2bn again

There might be a reduction in the size of the overall bond purchase programme by 25% to €60bn from €80bn of purchases per month, but after that initial drop in purchases over a month ago, there has been no material impact on the corporate bonds being accumulated.

After a low €1.1bn of purchases some four weeks ago, the latest haul showed that the central bank had lifted €2,258m of IG non-financial corporate debt last week (see chart, below). That’s two consecutive weeks again that purchases have exceeded €2bn – and more than we might have anticipated given the reduction in the overall purchases.

ECB weekly purchases

The total purchases to date, after 51 weeks, stand at €89,190m, with the long-term weekly average of purchases creeping higher to €1,749m.

Primary not stirring

The primary market endured a quieter session with just the one non-financial issue. That came courtesy of French retailer Casino (also announced a buyback) for an increased €550m at midswaps+170bp – some 30bp inside the initial guidance. That’s great for Casino coming unopposed and offering enough yield to solicit a decent order book at around 6x (rated high double-B). That deal takes the monthly total to €2.55bn for the asset class and to €25bn for the year to date.

There’s going to be some seasonality in the supply over the summer months (lower levels likely), but we are on course for a €50bn year and perhaps close to a record-breaking year of issuance. The pipeline is certainly good, the technical backdrop is supportive (low rates, good demand, crowding-out in IG – see above) and fundamentals offer comfort (low defaults and rating transmission risks).

There was nothing in the investment grade market as the non-financial sector probably keeps it powder dry for Wednesday’s session and Thursday (before non-farms on Friday), while the senior banking area also drew a blank. The covered bond market was busy.

Slow to get into gear

A fairly drab session as we returned following the long weekend saw equities down by up to 0.5% across Europe. There was probably some apprehension around the potential for a snap election in Italy, while there is a bit of a spat developing between Trump and Merkel. Draghi was at his dovish best and any growth slowdown will impact earnings/growth – but ultimately help support fixed income markets.

Election jitters in the UK, with Labour having a better time of it of late, suggesting no overwhelming majority by the Conservatives – if the latest polls are to be believed – saw bit of a safe-haven bid emerge at times and helped push Gilt yields back below the 1% level (10-year) – albeit just below as it closed to yield 0.99%.

The 10-year Bund yield was unchanged at 0.30% (annual German inflation down at 1.4% versus expectations of 1.6%) as was the OAT to yield 0.74%, while we saw BTP yield move higher in the session at 2.20% (+3bp) before closing unchanged!

US inflation dropped again in April (as measured by the PCE price index) as did consumer confidence in May, while house prices there grew at a decent clip in March. Treasuries were slightly better bid and US stocks got off to an indifferent start to the week.

In credit, we had a bit of a pullback in the synthetic space – in line with weaker stocks, with Main a touch better bid (higher) at 62.3bp (+0.7bp) and X-Over at 251.9bp (+1.9bp). Cash held steady as we might expect amid moderate equity weakness. It all left the Markit iBoxx index for IG corporate bonds at B+119.5bp (+0.4bp) and the high yield index up at B+325bp (+4bp). Sterling was the only market which was slightly better bid!

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.