24th April 2017

Feet up for two weeks

FTSE 100
7,115, -3
12,049, +21
S&P 500
2,349, -7
iTraxx Main
74bp, -0.75bp
iTraxx X-Over Index
290.5bp, -1bp
10 Yr Bund
0.25%, unch
iBoxx Corp IG
B+131.1bp, unch 
iBoxx Corp HY Index
B+372bp, -4bp
10 Yr US T-Bond
2.25%, unch

Markets to trade with positive bias

While not officially called, the polls – usually a good predictor for how the final first round result might stand – show that the second round will be a contest between Le Pen and Macron (as at the time of writing). And we would think that the markets are going to be in mood to rally, but at some stage nervousness will emerge and we will likely encounter some volatility into the uncertainty of it all. Markets like certainty.

We would think, though, that this is as ‘market friendly’ a result as we could have reasonably expected (Fillon failing after allegations of corruption) and investor positioning will be for an eventual Macron presidency. There might be some ‘what ifs’ along the way, and events/polls might dictate some daily moves, but we would think that voters of other candidates will generally swing behind the relative newcomer in Macron. Better to be safe than sorry? Historical precedence suggests that’s going to be the case. So do we write-off Le Pen’s chances?

Le Pen must be in with some kind of a shout of the highest office in the land. After all, she is in a two-way contest. There have been so many election upsets of late but such are the vagaries of the French electoral system, we think another major blip is unlikely going to come our way. Any dips therefore are buying opportunities. The dips might see equity markets drop say 1%+ in a session (buy), government bond yields rally hard (sell) and credit protection rise sharply (sell).

That is, any market weakness into the second round should be an opportunity top-up risk positions. We don’t think the cash credit market will see any material increase in liquidity (so add through synthetics) – nor any noticeable weakness!

Primary credit market flops

Away from that, we have to conclude that it’s been a shocker of a week gone by. Basically, nothing in primary especially so as far as IG non-financials were concerned. The HY market only offered up €650m through Unilabs and Nomad Foods although we did get a few financials to help park up some cash.

We’re into month-end week, and so five sessions to hopefully get the primary ball rolling again. Just €5.3bn has been printed in IG non-financials over a three week period but it can’t be a tough ask to think of somewhere around €10bn before we close out the month. The blackout period isn’t affecting every borrower and we believe the markets are very receptive to deals.

High yield issuance for the month stands at €3,335m and we think another billion of supply is a reasonable expectation this week given the size of the pipeline. Again, broad macro/geopolitics matters less as far as getting deals away. Only a massive (stock) market sell-off would curtail issuance.

But secondary credit holding firm

Whilst we have every right to be disappointed by the performance of the secondary bond market this year, it has managed to hold firm amid sometimes testing conditions which have affected other markets. Still, the ECB has taken €80bn of IG debt out of the market permanently but has failed to elicit materially tighter spreads in secondary or any noticeable increase in issuance.

We know that here is massive demand for corporate bonds – but it does seem like investors are mainly adding through primary and leaving the central bank a free hand (almost) to dabble in the secondary market. Offered side liquidity isn’t great, but good enough to fill the ECB’s coffers.

The Markit iBoxx index for IG corporates currently stands at B+131bp, and tightened a basis point last week with a grind better during the latter half of it. It is though just 3bp tighter in the year so far – and that is after an average weekly lift of some €1.7bn by the ECB. We also have improving credit metrics (a low default rate) and a persistently low-rate yield environment supporting a technically positive market. We should be considerably tighter. Mind, the smaller sterling market has also fared the same. Spreads closed last week unchanged (the index at G+153.6bp) but were drifting a little wider into the end of it.

The BoE will likely have hit its £10bn corporate bond QE target when it reports later this week, some 11-months ahead of schedule (of an 18-month programme)! The bank has obviously found it ‘easy’ to lift what it needs, but has been successful in seeing borrowers issue more in the sterling market (unlike the ECB). Still, spreads haven’t tightened through the QE period (actually, the index is 3bp wider) and that is a disappointment for investors although much performance from a total return perspective has been garnered as the underlying has rallied.

The one success has been the high yield market. Spreads tighter, good demand, high levels of issuance and performance have all contributed. And there has been little or no direct support for it. The manipulative hand of the central bank has been confined to the IG market and we can’t even assume that there has been a massive crowding out effect boosting high yield.

Whatever, spreads are 41bp tighter YTD and the index moved 8bp tighter last week. Finally, at B+372bp it is just 12bp off the lows seen for this year. The right election result and a risk-on period could push this market to new 2017 tights.

This week will be about how the market’s reaction to the French first round result. They will probably rally today, with OATs being the chief beneficiary and French corporate bond spreads might outperform too. But we also have US GDP and the earnings stream picking up, while Trump’s tax reform announcement might be forthcoming as well.

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.