6th June 2017

Holding one’s breath

MARKET CLOSE:
iTraxx Main

62.3bp, -0.1bp

iTraxx X-Over

248.7bp, +0.1bp

10 Yr Bund

0.25%, -4bp

iBoxx Corp IG

B+119bp, +0.5bp

iBoxx Corp HY

B+320bp, +3bp

10 Yr US T-Bond

2.14%, -4bp

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A drift into mediocrity…

There appears to be a dash for safe-haven assets into the ECB meeting and UK election, which are both due on Thursday. In the meantime, the data flow suggests that Eurozone macro is firming up as the latest surveys show that investor confidence is at a 10-year high (pre-crisis levels) and that year-on-year sales to the end of April beat forecasts.

So while risk assets (equities) came under pressure – we think more likely on fears that the US growth dynamic might not be as sprightly as first hoped – the losses in Tuesday’s session can easily be reversed. But if that is going to happen, we will not expect it until next week. Wednesday’s will peter-out into a nothing session while Friday will be about the potential repercussions following the election result.

In the UK, an unlikely Labour election victory will leave us a risk-off day – no doubt about it; a hung parliament and we again go lower amid fears of a left-wing coalition, while even a small Tory majority will not see any material relief rally. The least market friendly result will be a small increased majority for the Conservatives. The latter is probably the best we can hope for – if we can finally believe in the polls.

As for the ECB, we don’t think that they will change anything. Nor do we anticipate any material change in language. The Eurozone is beginning to show something that might turn out to be fairly resilient in terms of a recovery dynamic, but it’s early days and there is little need to change the current accommodative policy.


High yield shining

For credit, the brightest spot in the market is the high yield one. We highlighted in Tuesday’s comment that valuations were at record levels. The iBoxx cash index is showing spreads at record tight levels (the index benchmark changed in (2008), while the index yield is at record low levels.

We’re seeing quite clearly a huge bias by investors for anything which offers a bit of incremental yield. With rate markets failing to elect a higher-yielding environment (fears on recovery in US macro, low inflation and accommodative policy still ongoing everywhere), then this currently perceived safe-haven’ish asset has a good amount of support behind it.

It helps, of course, that equities generally are setting record highs as there is a correlation between the direction in equities and high yield credit spreads (it only breaks down infrequently).

The high yield numbers make for a super read for the asset class. That is, the Markit iBoxx index yield has never fallen below 3%, it is currently at 2.91% and is lower by 82bp this year (from 3.73%) – but 237bp lower since Jan 2017 (from 5.28%)!

Meanwhile, spreads have tightened by 96bp year-to-date and some 209bp tighter since the beginning of January 2016. If macro holds up and we observe little or no asset rotation (we’re not), then they are both going lower.


Light primary

In the primary markets, having drawn a blank across the board on a Whit-holiday Monday, we only managed a couple of deals in euro corporates on Tuesday. In non-financials, the sole deal came courtesy of HeidelbergCement in the form of a 10-year maturity €500m sized transaction, off a 3x subscribed book. The issuer managed to reduce the initial guidance by 20bp to eventually fund at midswaps+85bp.

Almost a week into the month, and non-financial issuers in the investment grade sector have printed just €1bn. That’s not what we expected, given the near €35bn seen in May.

In financials, Sumitomo Mitsui piped up with a dual tranche 5 and 10-year offering for a combined €1.25bn. There was nothing in the high yield sector. With those events looming on Thursday, we’re probably now writing this week off for any meaningful further activity. Wednesday’s session is probably the last chance saloon for this week’s primary activity.


ECB weekly corporate bond purchases decline

The latest haul showed that the central bank had lifted €1,516m of IG non-financial corporate debt last week (see chart, below) – after having exceeded €2bn for each of the prior two weeks.

ECB weekly purchases

The total purchases to date, after 52 weeks, stand at €90,706m, with the long-term weekly average of purchases at €1,744m.


Very defensive markets see out the session

Government bonds received the customary safe-haven bid and yields moved lower with it. The 10-year Bund yield was back down at 0.25% (-4bp), the equivalent maturity Gilt yield dropped below 1% to 0.98% (-6bp) while OATs were also an out-performer to yield 0.67% (-6bp).

The US Treasury yield fell 4bp to 2.14% (10-year maturity) although some of this might have been due to reports around the potential for a resumption of/or more Chinese buying. The US curve has been flattening for all of 2017, and will likely continue to do so as the Fed raises rates and markets worry about medium-term economic growth dynamics (2s/10s is now 85bp versus 120bp in January). Stock markets were all showing bourses in the red by up to 1% across Europe.

In credit, the synthetic iTraxx indices tried to move in the same direction as equities, reflecting that risk-off tone and so seeing to it that the cost of protection rose – but they actually managed to hold firm! That left iTraxx Main at 62.3bp (-0.1bp) while X-Over ended the day at 248.7bp (+0.1bp).

The corporate bond market exhibited a little weakness, but that was always going to be the case amid little flow and a defensive stance by the Street. The weakness – or wider marks, were limited and left the iBoxx IG corporate bond index at B+119bp (+0.5bp) and the high yield cash index at B+320bp (+3bp). The IG index yield dropped to 1.06% (-3bp) which is still a good 20bp off the record low. The sterling market closed unchanged at G+138bp while the Gilt rally saw the index yield at September 2016 lows of 2.59%.

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.