15th June 2017

High yield market breaking new ground

MARKET CLOSE:
iTraxx Main

57.1bp, +0.6bp

iTraxx X-Over

238.2bp, +3.3bp

10 Yr Bund

0.29%, +6bp

iBoxx Corp IG

B+117.6bp, -0.5bp

iBoxx Corp HY

B+306bp, -4.5bp

10 Yr US T-Bond

2.17%, +3bp

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All the boxes ticked…

✓FOMC. ✓BoE monetary policy meeting. ✓UK election. Done, done, done. All the boxes are ticked. Now for the market to do its thing through June with little in the way to distract it.

Unfortunately, though, Thursday’s session was as risk-off as we have seen for a while as the markets digested in particular the FOMC rate move as well as the BoE’s monetary policy committee rate decision. The economic data was more mixed and we’re still thinking that we’re broadly in a risk-on environment with valuations likely going to look even more stretched by the time the summer is out.

For the corporate bond market, that should mean decent levels of primary – and the numbers so far in June have been flattered by that €7bn fund raising from AT&T last week – with secondary markets pushing tighter. We’re watching the high yield markets because the better tone in the markets overall means that spreads and yields for high yield markets will go deeper into record territory. The 103bp of cash index tightening this year has been a stunning development and these low levels of valuations are virgin territory for even the most seasoned of investors.

We started the year believing that the Markit iBoxx HY index would tighten from B+413bp to around the B+360bp level. Instead it is at B+310bp and has returned almost 4% so far this year. The index yield has plummeted from 3.77% to 2.82% in the same period. It can’t be described as a high yield market in the traditional sense anymore. After all, the index yield was up at 6.4% in February 2016 and reached 12% back in 2011. The long term average has us used to yields anywhere between those last two percentages.

It is difficult not to believe that we are due a nasty correction. That the current investment process is akin to burying one’s head in the sand and ignoring all that’s going on. Except that, there isn’t much going on around us which fundamentally and/or technically suggests we shouldn’t be at these levels. That might not be the case if we compare to where equity markets are trading at the moment, especially the tech sector in the US.

However, in euro high yield markets, we’re investing against the backdrop of huge demand, obviously not enough supply – and rate markets being manipulated lower still by the ECB’s heavy handedness through the €60bn monthly QE effort.

All said, there will be a correction – or rather a move higher in spreads and yields – in due course. That will possibly be next year (and not this year as we might have thought 6 months ago). We do have an economic cycle after all, somewhere. So just like the Dot.com bubble bursting before it, it is all about the timing. For 2017 though, we believe there is much juice left in the high yield market.


Volatility creeping into tech stocks

Nuovo Trasporto Viaggiatori: €550m in the high yield market

The volatility creeping into the US tech sector is starting to have wider implications. We’re seeing the contagion affecting all other areas of the markets. That means – despite having highlighted the trend for European high yield markets as above – we’re going to see volatility here too.

Anyway, Thursday’s reduced session (Corpus Christi break in some countries) was a mixed one on the data front and a surprising one as far as the BoE MPC was concerned. US jobless claims in the week saw a bigger than expected decline while factory conditions in the mid-Atlantic and New York regions came in better than expected. However, US industrial production stalled in May as manufacturing activity dropped.

As for the BoE, the MPC voted 5-3 in favour of keeping policy rates unchanged and was a wake-up call for the markets and investors believing that rising inflation would be tolerated given the poor and declining economic backdrop. The sterling markets were all caught off guard. The currency perked up a little while Gilt yields gave back all of Wednesday’s declines. The 10-year yield was back up at 1.03% (+10bp) and we saw the same direction in the price action elsewhere with Bund yields in a similar maturity up at 0.29% (+6bp) and OATs at 0.64% (+5bp).

That volatility wasn’t going to stop Italy’s Nuovo Trasporto Viaggiatori from getting a deal away in the high yield market. The railway services group took an increased €550m in a 6NC1 floating structure at Euribor+350bp and took the high yield sector’s issuance tally to almost €4bn for the month. This week so far, there has been more non-financial high yield issuance than there has been in the non-financial IG market (€1.5bn)! And we’re just shy of €30bn of high yield issuance YTD.

The one blot on the credit copybook, though, was the 3-4 point drop in the price of Dutch insurer Vivat NV’s issue. The borrower launched a €650m 7-year senior note just a month ago, but news that the parent company’s chairman was detained by Chinese authorities saw sellers emerge and served as a reminder that issuer-specific event risk never really leaves us.


Corporate bond markets unfazed though

The synthetic market is usually the first port of call for how we might assess the day’s activity in the corporate bond market. The weakness in stocks therefore had an impact and we saw some weakness. iTraxx Main closed up at 57.1bp (+0.7bp) and X-Over at 238.2bp (+3.3bp) which suggest to us that the credit arena was unfazed by the weakness in stocks. And that is what materialised in the cash market. Spreads were marked a little better for choice, leaving the Markit iBoxx cash IG index at B+117.6bp (-0.5bp).

Admittedly, index yields popped higher off Wednesday’s lows given the back-up in rate markets, but spread markets were in good shape. Sterling credit was also better bid, and the cash index left at B+135.7bp (-1.75bp) – the lowest level since March 2015.

Saving the best until last, the high yield market had spreads crunch tighter – which is unusual given that equity weakness. The clamour for yield might just be promoting a technical support function for this market and we’re continuing to move deeper into record territory. The cash index saw a new low of B+306bp (-4.5bp).

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.