19th July 2018

Few will be getting rich(er) this summer

MARKET CLOSE:
iTraxx Main

65.7bp, +1.7bp

iTraxx X-Over

296.7bp, +4.9bp

🇩🇪 10 Yr Bund

0.33%, -1bp

iBoxx Corp IG

B+131bp, +0.5bp

iBoxx Corp HY

B+390bp, +1bp

🇺🇸 10 Yr US T-Bond

2.85%, -2bp

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Feeling content, though…

The week just gone is likely going to be a flavour of what to expect over the next few to come. Everything pretty much rangebound, that is. In primary, it will be the offering of the odd deal – and that includes those which require a little more effort like from the high yield market.

Equities will not be doing too much unless a major crisis erupts, but the upside is fairly limited, we would think, for the next few weeks even if (as expected) the second quarter earnings season delivers. In secondary credit, we are looking for a moderate tightening through the next six weeks, hopefully coming off the back of those rangebound equities and absent any material event risk. Even swap rates are close to flatlining, with the 5-year rate in a 3bp range and the 10-year only in a 4bp range over the past 5 weeks.

Certainly, that is how the credit markets are looking at it. There is some apprehension amongst investors that the ECB withdrawal of QE is going to have a material detrimental impact on spread markets. It might, but we don’t think so – because the selling pressure isn’t there. For sure, the lack of a tightening in spreads over the past few months has caused some angst and confusion, because secondary hasn’t been busy otherwise (ECB lifting ca. €4bn corporate bonds per month). Supply/demand/outstanding debt are all in favour of a ratcheting in corporate bond spreads. But no. The iBoxx IG cash index (as well as all other sectors, actually) has moved 35bp wider this year (+36%).

If we can move so much wider in IG – with similar percentage moves in HY and AT1 markets – with the ECB having taken so much debt down, it must follow that spreads are going to the moon once the ECB withdraws its ‘support’. Never mind that many portfolios are limit long cash – some investors are just buying short-dated floaters to keep below limits, but there is little reason to sell as it just puts pressure on this along cash positions. Because primary isn’t helping.

2018 so far will be remembered (so far, anyway) as being when the wheels fell off the primary market bandwagon. Yet, we have no crisis. The going is still good. Corporates have had it so good for so long, they’re exhausted. That is, they’re also hoarding copious levels of balance sheet liquidity and know that they can still print if need be – and at still close to historically low funding levels. How else does one explain €121.4bn of IG issuance in the year so far against €163bn in the same period last year and the lowest run rate since 2012?

Yet the high yield market continues. We have many new borrowers and issuers who want to get in quick to alleviate any ‘wall of funding’ pressures – and who are all prepared (usually) to pay up. Last year was a record for the full-year and at the end of July, we had been met with €39bn of deals. Bearing in mind that IG primary dynamic – and that spreads are wider across all markets (around 30% in HY/iBoxx index) – issuance this year is up at close to €46bn in high yield. And we still have a week or so to go before we see out July!


Up… then down. What else?

Word that the Chinese Premier was not up for making a deal (according to Larry Kudlow of the National Economic Council) on the trade talks helped nudge equities even lower and gave a bid to safe havens. Trump was busy lambasting the EU for the huge fine imposed on Google just last week – and criticising the Fed’s last rate hike. So the previous day’s gains were eradicated and the DAX, for example, gave up 0.6% while US stocks dropped by up to 0.4% (at the time of writing). The FTSE alone was in the black (just) helped by continued weakness in sterling.

The 10-year US Treasury yield fell 2bp to 2.85%, the Bund yield in the same maturity to 0.33% (-1bp) and the Gilt to 1.18% (-4bp). Amazingly, all these yields have held steady in a narrow corridor for the past month or so.

In credit, we finally had the ContourGlobal deal priced, the borrower issuing an upsized €450m 5NC2 structure priced at 3.375% as well as €300m in a 7NC3 maturity priced to yield 4.125%. The deal was due to be followed by Techem’s €465m 8NC3 notes, still to be priced at around the 6% yield mark. That took the number of HY deals YTD to almost €46bn. The offerings were the only ones in a very quiet session for primary, suggesting that the market is just about close on being done for the summer.

The indices had another off-day, the cost of protection rising in line with the broadly weaker backdrop elsewhere, and we saw the iTraxx Main index at 65.7bp (+1.7bp) and the X-Over index at 296.7bp (+4.9bp).

In cash, quiet. And we closed effectively unchanged (slightly better offered) with the iBoxx IG cash index at B+131bp (+1bp on the week so far). So all that was noise and it carried through into the market elsewhere with the high yield sector also pretty much unchanged with the index left at B+390bp.

We will back on Tuesday.

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.