2nd October 2017

Highs and Lows

MARKET CLOSE:
iTraxx Main

55.5bp, -1.1bp

iTraxx X-Over

249.5bp, -3.1bp

10 Yr Bund

0.45%, -1bp

iBoxx Corp IG

B+107.75bp, +1bp

iBoxx Corp HY

B+282.3bp, +1.5bp

10 Yr US T-Bond

2.34%, +1bp

FTSE 100

7,439, +66

DAX

12,903, +74

S&P 500

2,529, +10

Lacklustre session, but positive markets…

The economic related news flow was upbeat and allowed the new quarter to get off to a good start, although the mood was subdued as we took in the unfolding events on the terrible massacre in Las Vegas. The violence around the Catalan independence referendum was also difficult to observe, while the result actually had minimal impact on the markets. Even Spanish government bonds only lost a few cents with the yield on 10-year Bonos backing up to 1.69% (+8bp) – although the bigger moves have been occurring since early September in anticipation of the vote.

Eurozone unemployment was unchanged at 9.1%, while the manufacturing PMI was at a 6.5-year high for the region. It wasn’t quite the same for the UK, where manufacturing conditions worsened (more than expected) in September as the industrial sector expanded at a slower rate.

Equities were in positive territory across the board with sterling weakness boosting the FTSE to outperform versus its European peers. After the weak manufacturing data and consensus building that the UK is in for a more difficult period on that front over the coming quarters, some will be thinking that a November rate hike might be put back. Gilts were better bid and the yield on the 10-year dropped a touch to 1.33% (-4bp).

As for the credit market, the tone was also positive but not upbeat enough to have a non-financial borrower clip some funding. The troubles in Spain might have been used as an excuse by some, but we think the window is wide open for borrowers. The last three October months (in 2014, 15 and 16) have delivered €16bn, €16bn and €26bn of non-financial issuance, respectively, and we must be looking for €25-30bn this time – if we are going to get the year to close out being an average one.

Those October totals have been trumped by each the last three corresponding November months with €42bn, €28bn and €28bn of issuance, respectively. Anywhere around €60bn of issuance for October and November combined would take non-financial supply for the year into the €270bn area which will sit nicely in the average range seen over the past few years.

As a reminder, the high yield market is in touching distance of a new record with supply at €48bn so far this year. The pipeline is jammed full and we must be looking at a record year (exceeding €58bn) should macro and geopolitics remain supportive.


Record equities in the US – again

US equities marched higher, relentlessly. The Dow, Nasdaq and S&P set record intraday highs and closing ones, too. European equities were in the black by up to 0.6%, while the FTSE managed to rise by almost 0.9%. Changes to the US tax regime making the statute book were seen as the reason for continuation of the record-breaking run, while we have the non-farms to look forward to at the end of the week as well as the 3rd quarter earnings reports. The ISM manufacturing PMI for September came in at 60.8 versus expectations of 58.0 (previous reading 58.8), suggesting that the manufacturing sector remains in rude health in the US. The number was the best reading in over 13 years.

Rate markets were fairly stable in the session, with US Treasuries barely changed having opened better bid (10-year at 2.34%, +1bp into the close) while the equivalent Bund was yielding 0.45% (-1bp) at the close. There was nothing remarkable there.

We are still optimistic that the month can deliver on all fronts for the corporate bond market. The conditions are right and the demand is intact – and unchanged in the willingness for investors to get some bonds on board. It was a slow start to the week though in primary, and the blackout period preventing some borrowers from accessing the markets is going to be with us soon.

The only deal came from HSBC in Senior Financials for €1.5bn

Spread tightening, however, ought to continue after a fairly decent ‘recovery’ September – and we are likely going to visit fresh record tights for high yield markets as soon as the next couple of sessions (just 3bp to go). We will get closer to B+100bp for the IG cash Markit iBoxx index (currently around B+107bp). The record low here is B+94bp. And all that, even after total returns have been eaten into following the rate market weakness of late.

The only deal in the market was a senior financial offering from HSBC Holdings for €1.5bn in a 6NC5 format, following the same maturity structure of Barclays’ sterling issue last Friday.

In credit, the ECB releases its weekly bond purchases on Tuesday, there was only the one deal and it made for a very lacklustre session. Higher equities provided some boost to risk though, and helped the cost to insure corporate risk to fall. We closed with iTraxx Main at 55.5bp (-1.1bp) and X-Over at 249.5bp (-3.1bp).

In cash, low flows and volumes didn’t impact the positive tone and the market moved tighter. That wasn’t obvious in the index level which saw spreads wider mostly on index rebalancing, with IG cash marked at B+107.8bp and a similar move seen in the high yield market with the index left at B+282.3bp (+1.5bp).

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.