12th May 2019

Hope over fear

MARKET CLOSE:
iTraxx Main

65.9bp, -1.4bp

iTraxx X-Over

280.1bp, -3.1bp

🇩🇪 10 Yr Bund

-0.04%, +1bp

iBoxx Corp IG

B+131.8bp, unchanged

iBoxx Corp HY

B+431.7bp, -1bp

🇺🇸 10 Yr US T-Bond

2.47%, +2bp

🇬🇧 FTSE 100 5897.76, (-1.54%) 🇩🇪 DAX 12313.36, (-0.54%) 🇺🇸 S&P 500 3271.12, (+0.77%)

Scratching one’s head…

Who would have thought? No trade tariff deal and not close to one but equity markets still saw it fit to rally. The US markets were having a stinker before a late rally resulted in a 50-point swing in the S&P during last week’s final session. We’re scratching around for reasons as to why that might have been so. It would appear that investors were trading on the hope that a deal would be reached and that the Chinese (most likely) would cede to the US’s demands. Surely we cannot be looking at a serious global trade war.

The US markets were thinking otherwise for much of the session and were mostly much more circumspect, with equities taking a serious tumble (-1.3% at one stage, S&P) which left the S&P off by around 100-points versus the record high from only a week or so ago. Trump, though, was busy tweeting away, playing the tough guy – but also offering an olive branch to the stressed investment community. And so that late rally.

The rate markets were wary for most of it, as (to some extent) were credit markets. Credit primary continued to deal though, just it has done through much of the volatility we saw last week. Strange that is the case – but it is comforting for the European credit market, even as secondary spreads have come under pressure and there are no guarantees that transactions will trade up on the break. There’s cash that needs to be put to work. Baxter International issued on Friday for €1.5bn via a dual-tranche offering.

It means that investors are confident in the corporate bond market. New deals are still being taken down well even if the level of oversubscription has fallen for deals of late. That’s to be expected given the volatility besetting the markets. However, the deal flow has surprisingly picked up recently. April was a bit of a stinker for supply – but even as the market volatility has persisted, issuers have been pulling the trigger in May.

Issuance is up at €8bn this month so far from IG non-financial corporates against a poor €12bn or so for the whole of April. May can be a heavy month and we could be looking at somewhere of the order of €30bn of deal flow. We will need volatility in markets to get no worse than it is right now. Any improvements in sentiment could see upwards of €30bn get away.


Yes, we can

US core CPI missed, rising by only 0.1% month-on-month, helping the dollar to weaken while yields to fell reflecting the stubbornly low levels of inflation and expectations of continued dovish Fed policy on rates.

Having spent most of the session better bid, rates also succumbed to the late risk-on tone in the US and eventually gave a little back, leaving the 10-year US Treasury to yield 2.47% (+2bp). In Europe, there were moderate rises in yields as equities spent the session in the black, leaving the 10-year Bund yielding -0.04% at the close (+1bp), for example.

Eventually, the Dax closed 0.7% higher as other continental bourses managed just 0.3% gains, while the FTSE ended flat. In the US, the Vix declined by 3% to 16% as the S&P gained 0.4% following that late rally.

In credit primary, the deal flow in last week’s final session took in Baxter International as mentioned earlier, with the US borrower coming in a dual tranche effort split equally in a combined €1.5bn. The maturities were 5-year and 10-years and pricing came in at midswaps+50bp and midswaps+90bp, respectively.

HSBC France took €1bn

The book was only at €3.9bn and final pricing was 20bp inside the initial guidance levels. The other borrower was HSBC France which took €1bn in a senior non-preferred 5-year at midswaps+32bp (-18bp versus IPT).

Credit indices managed some recovery after some considerable weakness in prior sessions, with iTraxx Main 1.5bp lower at 65.9bp and X-Over 3.1bp lower at 280.1bp.

It was also the case for the cash market as we managed to stem the spread weakness. IG cash closed unchanged leaving the iBoxx index at B+131.8bp but was still 10p wider through the week leaving total returns at just under 4% year to date. Not bad.

The high yield market also ended flattish (1bp) on the index, at B+431.7bp but we were still 33bp wider in the week mostly reflecting Street defensiveness into equity volatility.

We think investors are broadly holding firm and on to positions. Poor secondary market liquidity is leaving a disproportionate widening in spreads versus the level of activity. Each bid request is met with a (usually) unpalatable offer. But it’s a mark wider, hence the exacerbated weakness in valuations. We think that the market might be looking to regroup as the trade issue gets largely settled, and if we are right, we will resume to spread tightening trend the part of which will be to correct the recent widening in double quick time.

As for this week, the last of the US earnings sees retailers (Walmart, Macy’s) close out the season. Data has housing, manufacturing and retail opening on the agenda whilst a raft of Fed speakers might give some clues as to their thinking on rates.

Have a good day.

Suki Mann

A 30+ 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 CreditMarketDaily.com.