29th November 2018

Fed the fish, now what?

MARKET CLOSE:
iTraxx Main

79.7bp, -0.7bp

iTraxx X-Over

343.9bp, +1.9bp

🇩🇪 10 Yr Bund

0.32%, -3bp

iBoxx Corp IG

B+165bp, +1.3bp

iBoxx Corp HY

B+494.5bp, +4bp

🇺🇸 10 Yr US T-Bond

3.02%, -2bp

🇬🇧 FTSE 100 6049.62, (-1.73%) 🇩🇪 DAX 12489.46, (-0.04%) 🇺🇸 S&P 500 3152.05, (-0.65%)

Because it won’t be enough…

The steady trickle of deals this week has been much welcomed (we think), especially as borrowers are paying up to get them done. Anything from 20-40bp versus the secondary curve is what it takes and we are getting a serious amount of repricing of secondary curves as a result. VW started with their cheap 4-tranche €4.25bn issue in early November, but we had €7.5bn from Takeda to absorb as well – plus a whole host of market volatility and apprehension to boot.

Of course, to get a deal away in this most difficult of year-end periods for the market means paying up. Remember, that event risk still lurks – Brexit, Trump, trade wars, Ukraine, Italy and oil.

We caveat the welcoming of a decent deal flow of late with a ‘we think’ because while cash balances are being absorbed, the repricing risk to secondary curves is not such a welcome development. Nothing is for free, so to say. It doesn’t help, either, that deals are not necessarily tighter on the break, so ‘cheap’ deals are usually trading cheaper! That’s because the market remains apprehensive generally leaving spread product usually trading better offered than bid. In addition, single name event risk is being punished hard too, with NEPI Rockcastle bondholders the latest to feel some material price erosion following accounting inconsistencies.

However, from some quarters, it was a big thank you, Mr Federal Reserve chairman! A dovish speech on Wednesday evening gave US equities a massive boost, now hoping/expecting interest rates are close to neutral levels. Equities there rallied hard and rate markets undid some of their Q3/4 weakness on the expectation that the interest rate hike process will slow from here.

The Fed might have just given equities a welcome boost and shot in the arm such that any material weakness from now until year-end might be unlikely and will keep performance for US equities in positive territory for 2018. It’s a different story for the European equity markets, though.

Unfortunately, it’s also too late for credit. Higher equities will be useful as they will boost confidence. But we don’t think performance will gain too much. We are still likely looking at something like -1% or worse for total returns in IG for 2018. While spreads have widened by 65bp YTD – and even if we can rally, we are going to be looking at a deficit approaching 50bp at best for IG (iBoxx IG). Anything more than that just doesn’t look achievable.


Credit’s worst month of 2018

Credit had just about its worst month for the year. We were holding up relatively well into it even after an October which was particularly bad for equities. IG credit has lost 0.7% (total return) in November with just a session to go, and that comes having barely lost that amount for the year to end October. IG index cash spreads moved 18bp wider.

The high yield and CoCo markets came under heavy bombardment, with returns for the month at -1.8%, as event risk, particularly around Italy and equity market volatility, weighed on sentiment towards the asset classes. The HY iBoxx index moved 55bp wider in the month. Recovery can only come if equities recover and stabilise and returning confidence promotes a better bid for higher-yielding paper. There are some good opportunities in the AT1 space, where yields of 7-8% for SIFI banks look attractive.

Sterling wasn’t to be left out. IG sterling lost 1.6% in the month, but this longer duration market was always going to underperform euro-denominated credit.

When set against equities, credit was not too far away from performing on a par. The Dax is off around 1% for the month but that market did have a couple of days of decent gains where otherwise it would have fared a lot worse versus IG credit. The S&P is flattish for the month, but that comes after a massive 2.3% rise in the US index on Wednesday following those comments from the Fed’s Powell.


Cautious and under pressure

Otherwise, Sweden’s economy contracted for the first time since 2014, German inflation as measured by the state of Saxony saw it decline to 2.1% in November from 2.5% in October and PM May gave an awkward defence of her plan to a House of Commons committee. Economic confidence continued to fall in the Eurozone and has done so for each month of this year. Finally, the Fed’s preferred measure of inflation, the core PCE deflator, showed that inflation in the US had fallen to an 8-month low of 1.8% in October.

So European markets opened sprightly, buoyed by that overnight ratchet higher in US equities, but then we faded the gains as those news items filtered through. Credit didn’t tighten on Wednesday into moderately better European markets and it failed to offer much upside on Thursday, too. In fact, primary was very surprisingly light for the corporate bond market.

We only had French corporate services group Edenred in the market for €500m in a long 7-year priced at midswaps+135bp (-10bp versus IPT, €1bn book). With Friday likely going to draw a blank, we close out the month with a good steady flow of deals totalling a very good €27bn, but a relatively paltry €216bn for the year so far. That compares with €259bn for the corresponding period in 2017 and €268bn in the opening 11 months in 2016. Banco Sabadell issued €500m in a 10NC5 Tier 2 deal at a hefty midswaps+510bp.

Rates had a good bid behind them all session, leaving the 10-year benchmark Gilt yield at 1.36% (-2bp), the Bund to yield 0.32% (-3bp) and US Treasuries 3.02% (-2bp). BTPs seemed to be holding from too, the 10-year yielding 3.25% (-2bp).

Money laundering probe: Deutsche Bank

Weak sterling boosted UK equities, which managed to outperform, up 0.5% while the Dax closed flat having been up 0.4% earlier. The euphoria from the previous session faded for US stocks and they were in the red as at the time of writing.

The latest single-name in the wars came courtesy of Deutsche Bank, whose offices in Frankfurt were raised in a money laundering probe. The bank’s 5-year CDS moved 5bp higher, T2 cash was around 50bp wider and senior debt moved wider by around 15bp.

Elsewhere, cash credit markets were their illiquid usual self and again a touch wider. The iBox cash IG index closed at B+165bp (+1.3bp) – and easily the widest level this year (+20bp this month). The weakness rippled through the cash market, leaving even the CoCo index 12bp higher at B+667bp – also the widest level this year. As for the high yield market, well not as bad with the index just 4bp higher at B+494.6bp.

In the synthetic area, iTraxx Main closed 0.7bp lower at 79.7bp and X-Over was left at 343.9bp (+1.5bp).

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.