22nd May 2017

Gimme all your lovin’

MARKET CLOSE:
iTraxx Main

  • 62.6bp, -0.5bp
iTraxx X-Over

  • 252.7bp, -0.6bp
10 Yr Bund

  • 0.39%, +2bp
iBoxx Corp IG

  • B+118.4bp, -0.5bp
iBoxx Corp HY

  • B+322bp, -5bp
10 Yr US T-Bond

  • 2.25%, unchanged
FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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Keep calm dear, keep calm…

With just a few sessions left to get through before we close out May – it usually leaves the business end of the month about preserving performance, squaring up positions and having strategies ready for the next. The first should pass by with little change from where we are now, given that tetchy markets might see everything play out in range-bound fashion unless Trump has something to do with it – then we will break lower (weaker). We don’t think there will much to do from a positional/strategy perspective.

We believe that most investors are running decent levels of corporate bond risk and will continue to do so, staying with that higher beta positioning, with duration close to home – to perhaps a little longer than index. June doesn’t really offer much by way of ‘known unknowns’ as the election season is over until September, leaving the biggest risk to sentiment and thereby the markets as being President Trump – and North Korea, of course.

€500m in a 7-year deal: G4S

An eye on performance has credit looking like it will deliver close to flat from a total return perspective, on spreads moving 3bp tighter in IG (Markit iBoxx index) with higher rates offsetting any upside in May. So far this month, high yield spreads have moved 20bp tighter and returns are a positive 0.3%, the front end of the underlying more buffeted from the volatility, leaving the high yield asset class enjoying a brighter period generally.

Sterling spreads are around 5bp tighter in the month, but the solidity of the Gilt rally so far has ensured that returns for this credit asset class come out tops at 0.8% for the month.

Monday’s session offered very little with odd deals in each of the corporate bond market sub-sectors. IG non-financials were represented by a benchmark from G4S (€500m in a 7-year, and 13bp inside IPT) and a Schipol Airport tap for €100m. Senior financials saw €500m from SEB while Sampo offered €500m from the insurance sector. Peugeot was the sole high yield rated borrower but was in for just €100m as it tapped the March 2024 issue. REIT Akelius lifted €600m in a long 8-year deal. That leaves the total for IG non-financial issuance at €27.65bn while the high yield total over the month to date comes in at €2bn.


ECB weekly corporate bond purchases

We had been thinking that the reduction in the size of the overall bond purchase programme by 25% from €80bn to €60bn of purchases per month might have been having a material impact on the corporate bond accumulations. Up until a week ago, that was the case – as the average grab had dropped to around €1.4bn per week through April, and that included a low €1.1bn three weeks ago. But we have been wrong-footed with the latest haul showing that the central bank had lifted €2,003m of IG non-financial corporate debt last week (see chart, below).

That higher accumulation last week should potentially be a good sign for secondary market valuations – especially if sustainable. It will, or ought to, keep spreads anchored at around these levels at least.

ECB weekly purchases rise again

The total purchases to date, after 50 weeks, stand at €86,932m, with the long-term weekly average of purchases at €1,739m.


Mixed markets open up the week

Sterling weakness and euro strength against the dollar saw to it that the FTSE rose a little and Eurozone stocks were mixed to generally a little lower. That after US stocks were close to regaining all of their losses of last Wednesday’s bid down day. Even the volatility index (the VIX) was back down at around 11.3% (it was above 15% a week ago). It looks like Trump is playing a blinder in the Middle East and that huge arms deal (worth $350bn to US corporates in sales) is a great headline grabber.

Government bond markets played out in a similar vein, with Gilts better bid (10-year yield down at 1.09%, -1bp) and Bunds/OATs better offered – the former yield up at 0.39% and the latter 4bp higher at 0.85%.

Credit markets were a little better, leaving the synthetic indices better offered (lower) as the cost to protect credit declined. iTraxx Main was down at 62.6bp (-0.5bp) and X-Over at 252.7bp (-0.6bp) and both just off their recent lows.

In the cash market we had a quiet session open up the week, but credit spread markets were generally better bid. The Markit iBoxx IG index closed at B+118.4bp (-0.5bp) while the iBoxx HY index ended at B+322bp (-5bp).

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.