26th June 2017

High yield market sets new records, but…

iTraxx Main

53.4bp, -0.1bp

iTraxx X-Over

232.7bp, -1bp

10 Yr Bund

0.25%, -1bp

iBoxx Corp IG

B+114.20bp, -0.5bp

iBoxx Corp HY

B+299.7bp, -16bp

10 Yr US T-Bond

2.12%, -2bp

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What’s good for the goose…

Stock markets off by 5% in the day and going lower over the next several sessions at least, safe-havens better bid and 10-year Bund yields close on 0% again (bid only into the panic). Corporate bonds better offered, and no Street bid there to entertain investors looking to reduce risk exposures as redemptions rise (fund outflows) sees the market witnessing the severest of pull-backs.

Main up at 100bp and X-Over touches 500bp. We’re in cyclical bear territory and the spiral of contagion engulfs all manner of risk asset pricing. “It’s all over” – to coin a phrase. We might suspect it is imminent but won’t see it coming – as always is the case, but as ever we won’t quite nail the event or the timing.  So we went with the flow. Safety in numbers, so to say. A fund manager’s only solace is that his peer group is feeling the same pain from the losses and hit on performance. So from that performance perspective, we’re down and out but so is everyone else.

Judging by some of the musings of late, that’s what we are looking at very soon.

We don’t buy it. In fact, we continue to believe that the “event” which likely promotes the dramatic market falls as described above – over a very short period of time – is impossible to predict.

The whole outlook – macro, asset prices etc – is a slow burning one. The key has been low policy rates – and subsequently low market ones – that have kept the huge global debt pile sustainably serviced. That debt-servicing has been key but we are unlikely going to see the growth rates or inflation to help reduce that burden. They’re trying to wean the patient off life support, but normalised policy is years away – and that includes in the US, even after these first baby steps as the Fed raises rates and reduces its balance sheet.

Few in the corporate bond market are panicking or beginning to reduce exposures to reflect that potential for financial market instability. In fact, judging by the receptivity to deals, it’s quite the opposite with a clear and increasing investor bias in exposure to higher yielding assets.

Yield is still one of the overriding drivers for investment, although there is much room for lower beta risk, if only to park up some cash given the expensive nature of leaving cash on deposit. And we have seen little of the contagion from any wobbling equities in corporate bond valuations, save for a relatively hefty pull-back in HY valuations in last week’s final session amid little real flows to justify it. It was reversed in stunning fashion on Monday (see later).

Markets off to a decent start

We kicked off the week with risk assets better bid. News that the Italian taxpayer was gong to be bailing out Banca Popolare di Vicenza and Veneto Banca – with the EU’s blessing, was well-received. Intesa helped out by taking the good assets, senior bondholders were not bailed-in while equity was written off while €1.2bn of institutional investor junior debt was wiped out. Fudge. But, no one wants to upset the delicate state of the markets right now, nor undermine what’s left of the credibility of the Italian banking system. The news saw protection shorts squeezed and the iTraxx senior financials index dropped to 51.4bp (from a 52.8bp close on Friday).

The news flow otherwise was quite mixed. The German Ifo business climate index hit a record high, the DUP were close to a deal with the UK Conservative government while UK credit growth slowed in May, heaping further pressure on ailing growth in the UK economy. In the US, the durable goods orders numbers fell in May for the second month in a row (-1.1% month on month) – and it was this number which had the biggest impact on markets in the session.

We saw a slightly better bid for rate product such that 10-year US Treasury yields fell to 2.12% (-2bp), Bunds to 0.25% (-1bp) and OATs to 0.60% (-1bp). Gilt yields also dropped back to 1.00% before ending the session at 1.01% (-2bp). Stocks were higher, closing with gains of up to 0.4% and off the session’s highs.

So we have a recovery of sorts, but little certainty of its overall durability. Rate markets tell us that. Equities are rich when assessed using traditional measures, but so long as macro continues to disappoint and rate markets price in continued cheap liquidity, then equities can remain better bid – and at these seen to be elevated levels.

Three is still the magic number in primary

Daimler: €4.05bn deal

Primary markets delivered a couple of three-tranche deals on Monday. Daimler was first out with €4.05bn issued off only a near €6bn book in a 7-year floater and 12- and 20-year fixed maturities and only 5bp inside the opening guidance levels. Next up was Fidelity National Information Services in 3.5- and 7-year euro funding for a combined €1bn with a sterling tranche for €300m in 5-years, with pricing tightened by 15-20bp across the tranches/currencies.

That euro-denominated issuance of €5.05bn on Monday takes the monthly issuance to within touching distance of that €30bn IG non-financial supply, to €28.2bn.

Other deals took in Nordea Bank (€500m 5-year Green bond issue), MetLife‘s £125m tap of its 20121 deal with OKB also tapping its 2022 sterling deal for a further £150m. Skipton Building Society wrapped up the unsecured deals with a £350m 5-year offering. There was the usual spate of covered bond deals.

Corporate bond purchases levelling off

The latest ECB data showed that the central bank had lifted an increased €1,503m of IG non-financial corporate debt last week (see chart, below). That’s a little lower than the €1,592 lifted the prior week, but we seem to have established a new weekly level averaging €1.5bn – in June we have, anyway.

ECB weekly purchases

The total purchases to date, after 55 weeks, stand at €95,222m, with the long-term weekly average of purchases at €1,731m. The technical dynamic of this enormous effort by the central bank for over a year continues to highlight how the crowding-out of investors in IG markets, coupled with the low yielding rate markets have combined to have a disproportionate impact on the super performance in terms of spreads, yields and returns in the high yield corporate bond market.

High yield record

So, in the secondary and synthetic credit markets, a slight better bid for risk in the day. In the synthetic space, iTraxxMain closed a touch lower at 53.4bp (-0.1bp) and X-Over at 232.7bp (-1bp). In secondary cash, there was relief at the Italian banking deal, and overall IG spreads were about o.5bp tighter as measured by the Markit iBoxx corporate bond index – and the lowest level of the year so far at B+114.20bp. The index yield dropped to equal the year’s low of 1.06%. The sterling IG market closed completely unchanged.

Last but not least to close out this note, the high yield market regained some of its composure after that weakness in spreads on Friday. Actually, it had a rip-roaring session according to the cash index levels! After a 10bp widening on Friday, the index showed a 17bp tightening after the marks went in on Monday’s close. Those moves are too big for any reasoned explanation. Anyway, the index level is now through the B+300bp for the first time, at B+299.7bp with the index yield also at a record low of 2.77%.

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.