- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 7,683.97, 7.69||DAX 12,686.29, -79.65||S&P 500 ,|
Greed? Fear? No, just pragmatism…
Another €1bn added to the high yield supply tally and it takes us effortlessly through the €60bn barrier in this record-breaking year. Also, the €12.6bn of supply this month so far makes it the second-best month since at least 2014 for issuance in the euro-denominated HY bond market.
The month so far has returned 0.7%, while for the year-to date, total returns are up at 6.3% for the HY iBoxx index. That’s fantastic. Does it make sense? Yes it does, and it blows out of the water even the most bullish of scenarios that anyone might have had when we started the year. We think there is more to come on the supply front for sure – this month, while from a performance perspective, we believe the same.
Investment grade issuance isn’t as effusive as the market might like, rates markets are still accommodative (even into any policy hike or QE tapering) and investors are sitting on enough cash which does need to find a home before the year is out. That cash prefers higher-yielding assets. So it’s a borrowers’ market and in a sense they are price givers into the end of the year.
The session otherwise played out into bit of a bore draw for the first half of it. The penultimate one, pre-ECB announcement left few corporates really interested (or advised) in getting deals away with investors also probably content to sit out Wednesday and Thursday’s sessions waiting for the big press conference.
Even the record-breaking level on the Dow overnight failed to stir the European equity markets at the open, leaving credit to languish, too. However, the Ineos and CBR Fashion Group high yield deals in the session got away with ease, and the rate-insensitive nature of this (asset class) beast means we could see others priced on Thursday and Friday.
Rate hike prospects rise, risk under pressure
Better-than-expected UK Preliminary GDP data for Q3 recorded a surprising beat of 0.4% versus expectation of 0.3%. Gilt markets succumbed to the prospect of a rate rise next month in the UK and the 10-year yield shot 5bp higher to 1.41%, and the highest level since the early weeks of this year. Bund yields in the same maturity managed to hold below 0.50% (at 0.48%, unchanged) as US Treasuries rose to yield 2.44% (+4bp).
Generally, we have a situation where we are likely going to see 25bp added to base rates in the UK, the Fed will raise too (in December) while the ECB needs to let the market know its tapering programme during Thursday’s scheduled press conference.
It’s all about baby steps as we travel a long, slow path to policy normalisation which is still going to take in several years before we get there. That also means that risk asset pricing (equities) ought to stay underpinned, and if market yields do not shoot higher, then credit spreads are also going to firm up into the improving economic outlook.
Fixed income returns though, in 2018, are going to be way off the stunning levels we have managed to gain this year. That is, any continued tightening in spread markets will not be enough to offset the rise in the underlying. More of that in January.
As for Wednesday’s session, there were no records set in US equities. Actually, there was a decent sell-off. US durable good orders came in at 2.2% in September versus expectations of 1% and new home sales were the highest for 25 years. With that improving growth outlook, tax reforms and the like thrown into the equation, it was time for some to fret about the rate impact on the markets – but also, to take profits. They will be back. European stocks lost up to 0.5%, the FTSE 1% and US markets were up to 0.5% lower and off the worst levels for the session.
Back to high yield primary
Ineos printed an increased €550m in an 8NC3 structure priced to yield 2.125% and CBR Fashion Group added €450m in a 5NC2 deal yielding 5.125%. So we’re up at €12.64bn for the month, and it is a fresh record €60.6bn for the year so far. It is amazing to observe that this year’s total is already almost €4bn more than the previous record for a full-year (€57bn in 2014).
This market is the success story for the year from a supply/performance perspective, helped in no small way by the ECB’s massive market manipulation (vis-a-vis corporate bond QE).
Elsewhere, French real estate group Mercialys issued €150m in a 10-year deal, but we had nothing in the IG non-financial sector or in the senior financial bond market.
Given the drop in equity markets, credit protection costs rose relatively moderately. iTraxx Main was up a basis point at 55.2bp and X-Over rose 3.6bp to 241.6bp. That’s no big deal, and it seems like credit markets were quite relaxed.
So in the cash market, there was no change at all in IG and it demonstrates the resilience of this asset class derived from the technical nature of it – demand/supply/ECB QE. The iBoxx IG cash index closed at B+101.6bp. The weakness in stocks made for a defensive bid for higher yielding assets and affected some of the ebullience we had seen of late, which saw the Street feeling confident to mark prices higher and add a premium to liquidity. Still, the CoCo index was a touch lower, down at a fresh record low of B+396bp (-1.2bp).
As always, we close with the high yield market and it closed… also unchanged, with the iBoxx index marked at B+259.6bp.
Have a good day.
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