5th June 2017

High yield credit sets records

MARKET CLOSE:
iTraxx Main

62.4bp, +0.6bp

iTraxx X-Over

248.6bp, +0.7bp

10 Yr Bund

0.29%, +3bp

iBoxx Corp IG

B+118.5bp, -0.3bp

iBoxx Corp HY

B+317bp, -3bp

10 Yr US T-Bond

2.18%, +2bp

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The week starts on Tuesday…

A wide open issuing window and borrowers usually jump through to get some funding away. A partially open one and it can go either way with some looking to get a deal in, others deciding it isn’t worth the effort given that there might not be enough of a market focus on their deal. On Monday, the window was closed given the Whit break across many parts of Europe.

Tuesday and Wednesday should see a material pick-up in primary market activity before we close into the ECB meeting and the UK election, while the US has former FBI director James Comey testifying to the Senate Intelligence Committee. The ECB will leave it all alone and we dare think with the usual comment from Draghi about the risks still being to the downside.

We will stick our neck out and suggest that the UK will still have Prime Minister May in her position come Friday morning with an increased majority – although not the knock-out majority that she might have expected several weeks ago.

In the markets, the session petered out into a bore-draw. Equities in Europe – where the markets were open – ended a touch lower, while government bond markets also edged a little lower (yields up a touch) and we would think that both markets were correcting and consolidating after some big moves last week. Primary was closed (in every sector) and so the impetus to get anything else done was, too.

As for secondary credit, the session was the usual light one we might expect for a Monday and especially so when half of Europe is enjoying a long weekend. Still, it was probably better bid for choice, highlighting the ongoing confidence in the asset class despite the heady valuations that the corporate bond market currently enjoys.

On the news flow front, we had Banco Popular shares fall to a new record low after a couple of the main bidders pulled out of next week’s auction for the beleaguered bank, and we had EdP stock plummet as senior officials at the Portuguese utility were named in a corruption probe.

Qatar was feeling some heat after some UAE and Middle East neighbours cut all ties with the sovereign state (accused of fuelling extremism) while the latest business activity survey showed that Germany was in rude health.


Measured start to the week

We had a small down day to open up with, but that was always going to be the case given the record closes into last week, and the potential for event risk this week. Performance year-to-date has been excellent for most investors in both fixed income (credit) and equities, and they have some good returns to protect.

We don’t see much on the immediate horizon that will necessarily sully that performance and indeed, as suggested in previous notes, we’re looking for a fairly perky June to see us through the quieter summer months (July/August).

Those equity markets which were open in Europe had the CAC as the main faller, down by 0.7% while the FTSE declined by 0.3% and both were off their session lows following a flat US market. The first set of US data this week showed that the service sector had slowed a little in May with the ISM gauge for non-manufacturing at 56.9 versus 57.5 the previous month.

The government bond market went through an equally uneventful session, with Gilt yields up a basis point (1.05%) in the 10-year bucket, Bunds showing 0.29% (+3bp) and Treasuries 2.18% (+2bp).


High yield credit in the ascendancy

In the synthetic credit space, the indices edged a touch higher (noise, really) with Main at 62.4bp (+0.6bp) and X-Over up at 248.6bp (+0.7bp) and basically in line with that very moderate weakness in stocks.

Wrapping up for the cash corporate bond market, the Markit iBoxx IG cash index edged a touch lower to B+118.5bp (-0.3bp) and sterling cash closed unchanged. In high yield, we squeezed tighter and this left the cash index at B+317bp which equals the record low for this index, and the index yield dropped a couple of basis points to 2.91% – also a new record low.

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.