4th July 2017

How exciting was that!

iTraxx Main

55.0bp, +0.1bp

iTraxx X-Over

245.6bp, +1.4bp

10 Yr Bund

0.48%, unchanged

iBoxx Corp IG

B+112.5bp, -1bp

iBoxx Corp HY

B+297bp, +1bp

10 Yr US T-Bond

2.35%, unchanged

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Not very…

After a fairly tumultuous end to June, it’s been a much quieter start to July. And Tuesday’s US Independence Day session left the markets with very little to do. In football parlance, it was bit of a bore draw. Equities generally played out unchanged, government bond markets tried their best to claw back some of their recent losses but to little avail, and credit exhibited a firmer tone but again not distracted by primary (which was quiet) or from those directionless aforementioned markets.

It’s probably too early to gauge whether we have an early summer for the markets, or whether we just needed to get July 4th and today’s Fed minutes out of the way. After all, the primary pipeline is excellent and deals could get done should borrowers so wish, and we think right up until the end of the month.

Macro news was light in the session, save for some stuff around UK construction activity (losing momentum) and Spanish unemployment where the rate dropped for the 43rd consecutive month. While it seems like the UK is in some sort of policy vacuum and lacking leadership, the Eurozone’s economic recovery steadily continues to show improvement, albeit off some very depressed levels.

There was more than a sniff of geopolitical event-risk in the air, with Trump and Putin slated to meet on Friday at the G20 Summit, but also with North Korea successfully test-launching an intercontinental ballistic missile. Judging by the lack of any material movement anywhere, the markets dismissed the latest North Korean effort.

Corporate bond purchases levelling off

The latest ECB data showed that the central bank had lifted a slightly reduced €1,398m of IG non-financial corporate debt last week (see chart, below). That’s a little lower than the €1,503m lifted the prior week (and after a 4 week average of just over €1.5bn).

ECB weekly purchases

The total purchases to date, after 56 weeks, stand at €96,620m, with the long-term weekly average of purchases at €1,725m. The technical dynamic of this enormous effort by the central bank for over a year now hasn’t gone unnoticed and soon they will hold €100bn of corporate bonds (almost 15% of the eligible market).

It 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 (-120bp YTD to record lows), yields (-87bp and just off record lows at 2.90% iBoxx index) and returns (+4%) in the high yield corporate bond market.

There was a deal but little else

Hapag-Lloyd finally got its upsized €450m deal away join a 7NC3 structure with a 5.125% coupon to open the account for the high yield market for July. And it shows how the relative insensitivity of the high yield market to either the gyrations in the rate markets or modest volatility in equities have little impact on primary.

High yield deals are long in the marketing phase and investors usually are not sensitive there to aforementioned risks. We would need some major confidence-sapping market moves to derail high yield primary. Away from this offering, the rest was SSA issuance on a quiet day for primary. In sterling, AA Bond Co took £250m in 6-year secured funding.

As with equities and government bonds, the corporate bond market as traded through the synthetic indices closed unchanged for Main at 55.0bp and just a touch higher in X-Over, left at 245.6bp (+1.4bp).

In the secondary cash market, we had small moves across the board amid very low levels of activity. IG spreads were a little tighter, leaving the Market iBoxx index at B+112.5bp (-1bp) and recovering half of the weakness seen the previous session.

The sterling market closed completely unchanged, the iBoxx index left at G+135bp. The high yield market was close on unchanged, a tad wider at B+297bp (+1bp).

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.