28th February 2019

More of the same will do nicely

iTraxx Main

61.2bp, -0.3bp

iTraxx X-Over

276.0bp, +2.1bp

🇩🇪 10 Yr Bund

0.18%, +3bp

iBoxx Corp IG

B+145bp, -1.5bp

iBoxx Corp HY

B+448bp, -3bp

🇺🇸 10 Yr US T-Bond

2.72%, +3bp

🇬🇧 FTSE 100

7457.02, (-0.58%)
🇩🇪 DAX

13789.00, (-0.91%)
🇺🇸 S&P 500

3386.15, (-0.70%)

Feeling replete…

We closed chapter two on a slightly sour note with no further breakthrough on the US/North Korean talks, amid data from China showing that the manufacturing sector continued to contract for a third consecutive month. But we’re in no mood to let that detract from what has been a very positive start to the year – and better than what most investors could have expected. When equities in Europe rise by 5%, by over 10% in the US and IG credit in Europe delivers total returns closing in on 2% – with high yield at almost 4%, we have to extremely satisfied. It’s early days of course and last year’s more difficult period is still fresh in the mind, but we have bagged some good performance as we ready for some testing times ahead.

While investors consider those performance levels and strategies for March (perhaps beyond) – although we don’t think much ought to change, there was some work to get through in the final session. Primary was still awake and we had several corporate deals to contend with. Ford issued in sterling and euros, Playtech offered up an altogether rare deal for the high yield sector and JP Morgan issued in senior.

The demand for the recent flow of deals has been fantastic, with book oversubscribed by anywhere between 3-6x almost consistently. It is highlighting the attractiveness of the corporate bond market as we slow down in macro but manage the decline by anticipating accommodative central bank policy (ie., keeping the liquidity tap turned on). In that sense we can expect credit spreads to continue to grind tighter, with that tightening checked if equities fall sharply at any point likely on geopolitical (or perhaps macro) event risk.

More broadly, equities were a sea of red with declines of up to 0.7% early on (FTSE underperforming) as the aforementioned issues weighed on sentiment. However, we stemmed the declines and closed out more mixed/positive across the markets. Nevertheless, we’re close to a recession in manufacturing just about everywhere, while sentiment wasn’t helped as Trump’s top trade negotiator offered only a cautious assessment of the ongoing talk between the US and China.

Macro is likely going to be the biggest driver for medium-term market direction in the sense that global weakness and recessions in various jurisdictions will keep policy needing to be fairly accommodative – we think for 2019, at least. In a sense, the shrugging away of the various evolving situations suggests that the markets believe this to be the case, too.

As long as we can avoid economic cliff risk and financial catastrophe, then we ought to be able to trade through the next month and the following quarter in much the same way as we have already. So risk markets ought to be buoyed by the expectation that headline policy rates (in the US) are staying unchanged for a while (Fed balance sheet reduction notwithstanding), and support the current level at least of the market.

Of course, geopolitics tensions are ever present. US and North Korea talks ended without an agreement but there appeared to be no spats for which markets could be thankful for. However, Indian-Pakistani tensions continued to rise and might be the start of something big if diplomacy fails in finding a solution to the recent terrorist attack on Indian soldiers, India’s response to it and the downing of aircraft earlier this week.

Just can’t get enough

The day’s primary had Ford Motor Credit issue €1.25bn in a 5-year at midswaps+285bp. The order book was up at a massive €6.25bn and allowed the leads to cut back on the initial terms by 35bp. That’s the eighth consecutive tranche in IG non-financial issuance from a US borrower. And it capped off a very good month for issuance, totalling €26.9bn against the equally solid €26.94bn issued in January (yes, almost identical issuance levels). Ford wasn’t finished there though. The US borrower also took £500m in a 6-year at G+345bp with books at almost £2bn.

In senior financials, JP Morgan lifted €2bn in an 8NC7 structure priced at midswps+70bp and was 25bp inside the opening guidance, made possible because the demand was so great, with books at over €6.5bn. For the month we closed with €15.1bn of senior issuance and for the year to date, it’s at €32.6bn.

In the high yield market, Playtech became only the month borrower this year as it issued €350m in a 7NC3 senior secured note priced at 4.25% (-25bp versus IPT) – to be priced. The total high yield issuance on the opening two months of the year comes in at €5.65bn.

We weren’t finished there, with the day’s other deal coming from Leaseplan which took €500m in a 5-year at midswaps+130bp. Books were at over €3.5bn and final pricing 25bp inside the opening salvo. Poland was the latest sovereign in the market, taking €2bn in a dual-tranche green bond.

Credit still grinding tighter

The markets displayed a more volatile day to close out the month. European equities generally managed to close small in the black, the FTSE staying as the underperformed and off by 0.5%, while the US was close to flat, as at the time of writing.

Rate markets gave some back again, leaving the 10-year Bund yield to rise to 0.18% (+3bp) and the US Treasury to 2.72% (+3bp). Gilts were also weaker, the 10-year yield up at 1.29% (+2bp) at the close.

In credit, the new issue market was open and so was the main distraction in an otherwise quiet close to the month. The Markit iBoxx IG cash index still managed to tighten as spreads grinder tighter and the index closed 1.5bp tighter at B+145bp, or 27bp tighter this year with 15bp of the tightening coming in February.

High beta debt prices were undeterred by the more circumspect moves in equities (correlation high), and the AT1 market was tighter with the index 10bp better at B+570bp (-140bp YTD). The high yield market closed slightly better bid too, the index left at B+448bp (-3bp) which is 75bp tighter over the last two months.

Finally, in the indices we closed with Main at 61.2bp (-0.3bp) and X-Over at 276bp (+2.1bp).

Have a good day.

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.