1st June 2017

Go with it

MARKET CLOSE:
iTraxx Main

62.4bp, unchanged

iTraxx X-Over

250.5bp, -2.5bp

10 Yr Bund

0.31%, +1bp

iBoxx Corp IG

B+118.9bp, -0.6bp

iBoxx Corp HY

B+321bp, -2bp

10 Yr US T-Bond

2.22%, +2bp

FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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Go with the flow…

President Trump is the main event risk for the markets, because the rest seems to be controlled or controllable. June has started off on the front foot and the upbeat tone looks well-placed and deserved. The latest data set from the Eurozone on manufacturing employment suggest recovery is well-embedded, while it is not too shabby in the UK although manufacturing PMIs have slipped back from 3 year highs.

Equities moved a little higher, duration was better offered, credit was better bid and while we had a decent amount of supply in Thursday’s session, we did have the opportunity to digest the heavier load from Wednesday’s session.

Year to date returns for investment grade (Markit iBoxx) sit at 1.0%, for high yield at 3.6% and sterling corporate bonds at 4.0%. These are numbers that we would have been happy to clip for the full-year. Should rate markets hold at around these levels, then we’re expecting the total return profile to look much better come the full-year’s performance. There’s carry and spread upside to be had. Equities come out tops though (as we might expect) with the DAX up 10%, the FTSE over 5% and the US indices around 7%.

We head into this month staying with the same strategies. That means overweight credit and running a portfolio beta greater than 1.0. The bias is for higher-yielding assets and financials given the recovery dynamics in the latter while we also like CoCo debt – Spanish bank risk notwithstanding (rather Banco Popular’s AT1 debt).

The high yield market has spreads at around record low levels and we would think this month ought to see that go deeper into record territory as the crowding out from the ECB’s IG non-financial paper accumulation continues to depress secondary market liquidity and spreads/yields in IG.

It should hold little fear to allocate more to HY given the basic dynamics for this market – supply, demand, fundamentals and macro – are all supportive. IG investors have been increasingly prevalent in this market over the past several years, and we expect this to stay the case through the remainder of this economic cycle. There is a trend in place, so just go with it.


Higher yielders in primary

€600m deal for Leonardo

There was a clear higher yield flavour to the primary markets in Thursday’s session. Leonardo (or Finmeccanica as it used to be known as) took 20bp off the initial pricing guidance for an increased €600m, 7-year deal priced at midswaps+120bp.

German group Otto took €300m also in a 7-year deal to yield 1.95% – and over 40bp lower versus the initial guidance. Finnish group Ahlstrom-Munksjo added €250m to the day’s high yield issuance in a 5-year deal at midswaps+175bp – and managed to get a 35bp concession versus the initial price talk.

Banco Popular might be having some serious existential problems, but there is investor differentiation occurring and this allowed CaixaBank to get a €1bn PNC7 AT1 structure offering a yield of 6.75% away. The book was over 3x subscribed.

Anyway, a billion or so on the opening session of the month in the non-financial high yield market is a good sign around the receptivity of the investor base to deals and could well see a very good June for total issuance. We’re up at €26.6bn for the year so far in this market and on for some kind of record level of supply if we can keep the momentum going. A lot will depend on broader market volatility as timing of deals really does depend on market confidence.

Away from high yield rated issuers, we had Aeroporti Di Roma lift €500m in a 10-year transaction at midswaps+90bp (and 15bp inside IPT) as the sole borrower in the IG non-financial market. After almost €35bn of issuance last month – driven admittedly by 6 borrowers living over half the monthly total, we ought still be looking in the context of a €20bn month before we slow down for the July/August holiday period. Senior financials were represented by RBS in the form of a 3-year €600m floater.

There were deals also in the sterling market with Severn Trent printing £250m, as did Bank of Novia Scotia taking the same. CPUK took a combined £730m in HY single-B deals (dual tranche).


And upbeat macro leaves risk better bid

Better-than-expected private hiring (ADP report for May) and manufacturing growth data from the US lent a further hand to an already upbeat opening day of the month. US stocks were again setting new record highs amid a decent enough risk-on session (S&P, Nasdaq).

That’s not to say that government bonds sold off in any significant way. The weakness there was very limited. Yields for 10-year Gilts backed up to 1.07% (+3bp), Bunds were yielding 0,31% (+1bp) and US Treasuries 2.22% (+2bp) – all in the same maturity bucket.

iTraxx Main closed unchanged at 62.4bp while X-Over edged lower to 250.5bp (-2.5bp). In cash credit, the market was better bid, albeit in a limited session as is usually the case given the poor secondary market liquidity situation. The better tone though left the iBoxx IG corporate bond index a little lower at B+118.9 (-0.6bp) and the high yield market at B+321bp (-2bp).

We are set up for another positive session today in Europe after the record closes in US stocks overnight.

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.