25th July 2016

In the Summertime

MARKET CLOSE:
FTSE 100
6,730, +31
DAX
10,147, -9
S&P 500
2,169, +4
iTraxx Main
68.5bp, +1.5bp
iTraxx X-Over Index
318.5bp, +5.5bp
10 Yr Bund
-0.03%, -1bp
iBoxx Corp IG
B+126.5bp, -0.5bp 
iBoxx Corp HY Index
B+459bp, -2bp
10 Yr US T-Bond
1.57%, +1bp

Last bite of the cherry…

It might be the final run-in to the holiday season, but we’ve seen for a while now – and will to continue to observe – a persistent grind better in credit spreads. It’s been a fabulous July for corporate bond spreads, helped by the ECB’s participation while we can also credit some of the upside to the lower levels of issuance over the past several weeks. With little issuance expected through the rest of this month and August – and with the ECB likely lifting what it can during this period, we will see an unusual (but still very low) level of secondary market activity and spread tightening through August.

We get the latest weekly ECB shopping list today, where the average take-down has been at around €2bn/week. That’s €10.4bn in 5 weeks of activity that has permanently reduced the amount of non-financial corporate debt outstanding (or 1.6% of the eligible universe, of around €660bn). That is only going to rise over the coming year, and squeeze out players, force greater corporate bond risk taking, keep valuations at historically rich levels and set new records for corporate bond yields  – and quite likely for spreads too.

Into the end of last week, the Markit iBoxx IG corporate bond index saw spreads inch better again, to B+126.5bp (-0.5bp in the session, -5bp on the week) and the index yield reached another record low of 0.93% (-3bp in week). And, as if we need reminding, total index returns stand at 5.35% YTD while spreads have tightened by 27bp in 2016.

The record low in spreads as measured by the Markit iBoxx index was B+94bp (set in early 2015) and is a good target to set for the end of this second half. The last session’s moderate tightening was seen across the board, albeit amid limited volumes and flows, which is to be expected as we enter the holiday period. This was reflected in the HY market, where interest was even more limited, and index spreads tightened by just 2bp to B+459bp.

contour global

HY Deal: ContourGlobal

The deals in the session came from the high yield sector with a tap from ContourGlobal, Lecta clocking up €650m in issuance between them, and Naviera Armas also in the market. There was nothing in IG. So just €10.65bn has been printed this month (IG non-financial issuance) so far, and we don’t expect much more with the lull around the FOMC to come later this week. It seems that we will close out July with less than €13bn – maybe €14bn tops – of IG non-financial issuance. And finally, the synthetic indices played out to the uncertainty around stock markets with Main up at 68.5bp and X-Over a little north of 318bp.

Recovery in other assets

christine-lagarde

Trial: Christine Lagarde

Overall, we closed out last week a little under the hammer. A bell-weather proxy for global economic health and expectations – John Deere – was laying off 11% of its production staff as demand sagged, the IMF’s Lagarde learned that she was to stand trial for negligence on the misuse of public funds, post-Brexit UK PMIs came in as bad as feared and sterling took a pounding on the back of it, closing out with a $1.30-handle.

UK GDP is set to contract in Q4 and the way is clearing for the BoE to cut rates in August. German PMIs hit multi-month highs though and offered the only decent news flow in the session, because data showed that French industrial output in June was still contracting albeit at a marginally slower pace than the previous month, while the slew of earnings reports offered a disjointed picture. In all, this was the type of mixed information (after a decent run) which reminds us that we still have a ways to go before we even think about being in the clear.

Equities were in no-man’s-land on Friday, but overall they had a good week. The DAX is now above 10,000 again, but still some 600 points lower than where it started the year (-5.5%). That is still a decent comeback for this index, while the FTSE is up almost 8% YTD, and ended last week at its highest closing level of 2016. Mind, sterling has had a bad time of it. In government bonds, we had Gilt yields closing lower in the session on that raft of post-Brexit related weak economic data. The 10-year Gilt yielded 0.79% )-4bp, while a choppy session also saw Bunds on the up (in price) and the yield on the 10-year at -0.03% (-1.4bp). There might be bit of a defensive nature to proceedings as we kick-off today owing to the tragic events around Munich this weekend.

The FOMC will be excuse enough to curtail much of the activity this week, while there is a raft of US economic data due taking in second quarter GDP and consumer spending with the quarterly earnings season reports in full-flow.

That’s it for today. Have a good week, back tomorrow.

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.