17th September 2017

Immunity

MARKET CLOSE:
iTraxx Main

50.5bp, -0.6bp

iTraxx X-Over

225.4bp, -0.6bp

10 Yr Bund

0.43%, +3bp

iBoxx Corp IG

B+108.5bp, -0.7bp

iBoxx Corp HY

B+288bp, -3bp

10 Yr US T-Bond

2.21%, +1bp

FTSE 100

7,215, -80

DAX

12,519, -22

S&P 500

2,500, +5

UK rate markets running scared…

Another North Korea missile test is simply brushed aside by the markets. It is going to take a little more to ruffle the feathers of risk markets given that we have seemingly now become more immune to the risks that such as this. This is an another ongoing example that the markets are actually well-supported by the huge amounts of liquidity in the financial system which need investing and the forgiving nature of the investment process.

We even know rates are going higher in a potential concerted policy shift (Fed, BoE, ECB) next year but that rate markets are holding relatively firm into it. Admittedly, that’s Gilts aside, as they had a shocker last week.

That aside, it was a strangely subdued end to last week, where equities in the US had traded and closed at around record highs, but European stocks didn’t really feel the warmth of those records. The UK equity markets (consistently moving lower) were preoccupied with sterling’s strength which rose sharply on expectations of a rate rise as early as November.

So, rate markets generally gave up some gains early on in the week, but were then flattish at those higher levels for the last few sessions. However, with yet another (and previously more dovish) MPC member suggesting that the need for higher rates was nigh, Gilts took another major leg lower. The 10-year initially jumped 10bp higher on Friday before recovering a little to close at a yield 1.31% (+8bp), while the 5-year rose to yield 0.74% (+8bp) and the 2-year to 0.42% (+4bp). It capped off a poor week for the Gilt market where the 10-year yield rose 30bp!

Sterling was close to $1.36 and up almost 5c. The FTSE lost 1.2% in that final session of the week having nursed losses in prior sessions. Sterling corporate bond market, though, have been unimpressed by all that jockeying for position we’re seeing in rate and FX markets.  They have been unchanged for the past four weeks, for example, as recorded by the IG Markit iBoxx sterling corporate index (unchanged at G+135bp).

Elsewhere, euro-denominated debt market corporate bond spreads continued to grind out performance through the week but without any real flow behind the moves, while primary admittedly disappointed given that we got off to a super start in the week and we know demand for paper through primary is extremely high. New issues have also been generally performing well, fuelling investor confidence and feeding through into justifying the continued  inflows into the asset class (mainly IG funds).


US stocks markets set pace

The hurricane season impacted US industrial production in August which fell by more than expected, while retail sales also declined – by 0.2%, against expectations of a 0.1% rise. The data will have a bearing on third quarter GDP and might also have an impact on this week’s FOMC deliberations. Whatever, the S&P at 2,500 and the Dow at 22,268 were showing record levels at the close. As mentioned above, European stocks have likely been more preoccupied with currency strength versus the dollar and have failed to do much during the week, generally up just a little through it.

The bond markets were choppy and, having rallied in the prior week, were busy giving some back. The 10-year Bund yield rose to 0.43% which was around 13bp for the week, while the equivalent maturity US Treasury was up at 2.20% – also around 13bp higher in yield in the week. The hurricanes have passed, North Korea missile testing isn’t seemingly worrying markets and we would believe that the Fed will not be moving on rates.


Credit grinding out performance

With the US stock market at record levels, the European ones are getting their heads around the currency impact on earnings (and valuations), while the broad sense of ‘risk-on’ is creating a positive environment for credit markets. Returns in the sterling market will have been hit hard by the sell-off in Gilts, but spreads generally are on a tightening trend again. The Markit iBoxx IG corporate cash index closed last week at B+108.5bp which was almost 4bp lower in the period. We don’t see any reason why that trend can’t continue as we head for the year’s low level of B+103bp seen in early August, and compares with the February high of B+137bp.

The high yield market similarly is in recovery mode – not that it was in a hasty retreat before that – and the cash index is now at B+288bp, which represents a 13bp tightening in the week. Nothing’s changed apart from a bunch of new issuance and the better sentiment for risk assets to see the Street mark bonds better. The low level for this index – which also a record level – is B+276bp which was reached several weeks ago. A positive tone this week could see us exceed it.

The iTraxx indices are at lows not seen for a several years with Main down at 50.5bp and X-Over trading off a 225bp handle. They’re suggesting that the outlook is rosy!

The new issue markets delivered in fits and starts. Friday’s session drew a blank in corporate primary, save for a £1bn secured issue from Land Securities in a 20-year maturity at G+90bp. However, we had twelve individually priced issues which came up with €6.9bn of debt, and took the total for the month – with two weeks of business to go – to €15.6bn. We know that the pipeline is bursting at the seams, and we continue to hold out for a €30bn+ month on the IG non-financial front.

As for high yield, SoftBank‘s €2.25bn dual tranche offering took the weekly total to €3.8bn, and the monthly total to €6.3bn. We are on target for €10bn considering (again) the pipeline of deals.

This week should keep investors occupied by the new deal flows, and we might hit a quiet patch come Wednesday pre-FOMC, while Theresa May’s big Brexit speech comes too late (on Friday) to influence anything. With that, there is little reason not to feel that we can’t continue to see risk assets better bid, which ought to leave spreads on that tightening trend and indices close in on those year tights in IG, and record lows in high yield again.

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.