- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
A much-needed respite…
A merry month of May it is not – for some. Credit markets are chugging along, showing moderate albeit understandable weakness under a deluge of issuance. Govies are holding firm, with yields now heading back towards their historic lows. Equities have been very volatile, uncertain as to whether the direction ought to follow the macro picture, the earnings story or the oil price – or a combination of all three. We are half way through the month, and as usual that means taking a breather and seeing how we have done.
The corporate bond market has been flying. Not from the perspective of secondary spreads, but more where performance has ratcheted higher – although we think spreads have held up fairly well considering. And that is considering primary, where the level of supply has been very high, will surpass the previous record for the month (we believe) and may even break the previous all-time monthly record.
On performance, year-to-date returns for IG credit are +2.9% and some +0.3% for the month so far, with index spreads 6bp wider – and all the performance in May coming from the rally in the Bund. We think the spread tightening component will add some in due course; we just need a few sessions of reduced supply and a nudge from the ECB. High yield hasn’t fared as well, as this shorter duration index product has not benefited from the front end of the underlying rallying, losing 0.7% of performance this month on Markit iBoxx HY index spreads wider by 30bp. The 2016 performance to date has also fallen back to +2.6%, having been over 3% to the end of April.
So, while credit has been fairly predictable and exhibited more limited volatility thus far, it’s not the same for stocks and government bonds. The 10-year Bund yield has been as high as 31bp of late, but is now down at 15bp as macro fears resurface. This particular yield has had worse pullbacks, and we would think that it will test historic lows (0.047%) soon enough.
Gilts have been as choppy, probably exhibiting some correlation with the Bund and dependent on the latest Brexit drama/polls. For stocks, the DAX is having a bad time of it this year. Down by around 6.5%, failing completely to reach the opening level of the year in any session and barely clinging on to the 10,000 level (closed 2015 at 10,743). Other European stocks are also in the red, but to a lesser extent.
Corporate bond market has more to give
The Heinz, J&J, Total and GM deals are having a good time of it, with all the issues trading inside reoffer levels. The high-yield Volvo and Wepa deals were trading up too. Infrequent names or structures with a bit of yield given those attributes, and even though the deal dynamic followed the norm (cheap to start, pricing ratcheted tighter and then not so cheap at final reoffer) they set us up for more of the same into next week. Almost €20bn was printed this week in IG non-financial corporate issuance and even the more bullish of observers could not expect that to be repeated. Half that level through the third week of May would set us up nicely to see secondary gain some momentum and recover a little, but also for any of May’s underperforming deals to tighten up.
But eurozone equities look to give up
Incredibly, the DAX index seesawed in a +/-1% range on Thursday, eventually ending at close to the bottom end of it. It was a very choppy session, with little obvious news flow to motivate such swings in the equity indices. Any news we did get was around the Brexit debate, with Germany’s Schäuble throwing in his tuppenny worth and Carney again stating the obvious. Monsanto bid talk by Bayer was the other material news of the session. European stocks ended lower in a 0.5-1.1% range, while the S&P was also busy giving back its gains from earlier this week. Government bonds also gave some back, leaving the 10-year bund to yield 0.15% (+3bp) for example, and the equivalent Gilt 1.40% (+1.5%).
The only corporate bond deals of note came from Suez, which sold €500m 12-year maturity debt at just 5bp inside the initial guidance level, while Deutsche Bank paid up for €750m T2 notes at midswaps+400bp – in line with the initial price talk. After a difficult first quarter for the borrower that saw its shorter AT1 issue trade down at €70, the German bank needed to be generous.
We closed out with spreads a touch weaker in secondary, and the sell-off in the underlying also impacted the index yield, leaving the Markit iBoxx IG corporate index yield at 1.32% (off the week’s/year low of 1.28%). There is nothing major in it, just a market slightly better offered, for choice. And that was reflected in the HY market which closed unchanged. The indices went with the weakness in stocks, iTraxx Main at 77.5bp and X-Over at 326bp.
Have a good weekend.