24th January 2017

In Trump, some fret

FTSE 100
7,151, -47
11,546, -84
S&P 500
2,267, -5
iTraxx Main
70.5bp, +1.5bp
iTraxx X-Over Index
292bp, +7bp
10 Yr Bund
0.36%, -6bp
iBoxx Corp IG
B+134.4bp, +0.3bp 
iBoxx Corp HY Index
B+383bp, +3bp
10 Yr US T-Bond
2.40%, -6bp

The sense of crisis goes on, for some…

We suggested previously that the year has again turned out to be very directional for the credit market. That is, sectoral allocation and, perhaps to a lesser extent, grappling whether to go long or short duration are strategies that are too early or too precise to be played in a market bereft of trading/secondary liquidity. It’s been this way since 2009.

And that is how these early weeks of the year are playing out. First and foremost, it has been about getting risk on board.

Primary has had a good time if it with €23bn of non-financial issuance in the opening three weeks of business. Secondly, we’ve taken what we can and that means on average, longer duration issues than some might have liked. Thirdly, high beta risk has outperformed.

The latter point has been best observed in the performance of the high yield market which is comfortably in the black from a returns perspective (+0.6%) and spreads have ratcheted tighter, too (iBoxx index spreads 33bp tighter), helping benchmarked investors in the process. IG credit is in the red (-0.35%) and spreads are pretty much flat, while new deals have been hit-and-miss in terms of spread performance.

The only stickler has been the credit duration trade where the shorter maturity HY market (returns +0.7% ytd) has benefited versus IG.

At the moment, yields are being supported by the flight to quality trade on fear of what Trump’s policy of a more inward looking America might mean for global growth. The medium term signs are ominous, that underlying yields might well be going higher (even from these levels in Europe) as pro-growth fiscal expansion and more government borrowing to fund it – in the US – play out to President Trump’s ‘America First’ policy.

Primary still pumping out deals

Deutsche Telekom: Huge deal

It wasn’t the most prolific of sessions, but Deutsche Telekom pitted its wares on Monday with a 3-part deal for a massive €3.5bn on books of around €7.5bn. Refreshingly, the initial price talk was very generous – for them.

Mind, swap yields had gapped in the past week. They went out with 4, 7 and 10-year deals priced +10/15bp, +20bp and +30bp versus the curve. Cheap – because they probably knew they were going for size. And the final pricing wasn’t rammed like many of the deals before it, as we were left with 7-12bp of tightening on the 4-year, 12bp on the 7-year and 17bp on the 10-year.

There should be some juice in this deal in secondary although the size of the tranches might be a hindrance (€1bn for the shorter and €1.25bn for the other two tranches).

That was it in a session which really took in a high level of nervousness around US economic, geopolitical, domestic and other policies!

ECB corporate bond buying accelerates

We now have information from week 33, and the ECB’s IG non-financial corporate bond buying programme has seen the central bank lift €2,876m – the best week since the corporate quantitative easing began. The acceleration in the bond-grab has them up at  €56,886m in total (see chart).

ECB weekly purchases hit record

Interestingly, the share of the primary market deals in that total has risen to 13.6%, and this is the highest proportion that the ECB has been at. Small wonder deals have been ratcheted tighter of late.

It is probably becoming very difficult for even the ECB to find enough bonds – and value – in the secondary market. That has probably meant the ECB becoming more and more involved in the primary arena.

It follows that it is going to be mighty difficult for a deal to fail, if this is indeed the case. It also means that it is a ‘gimme’ that deals will continue to see pricing ratcheted tighter from those initial guidance levels.

Markets start week defensive

The tone overall was fairly sombre as participants digested President Trump. The moderate risk aversion saw 10-year yields (safe haven benchmark proxies) all lower with the US Treasury at 2.40% (-6bp), the Bund yielding 0.36% (-6bp) and Gilts 1.36% (-7bp).

Stocks were lower across the board by up to 0.75%. The FTSE was never going to gain much into the Brexit Supreme Court ruling today, the DAX was the worst performer – probably on how US policy will impact the corporate sector of this great capital goods exporting nation.

In the corporate bond market, secondary activity was fairly limited – and that is no bad thing, given that spreads were barely moved while stocks and government bond markets gyrated to the latest Presidential “sign offs”.

The Markit iBoxx IG corporate bond index was left at B+134.4bp, a small widening on the previous session. Likewise, sterling credit was unchanged to a touch better offered for choice. In HY markets, we surprisingly gave a little more back. Admittedly, there isn’t too much going on, but weaker equities likely preyed on making a more defensive bias by the Street. The index closed up at B+383bp.

And finally, index closed weaker as we might have expected given the defensive nature of the markets. iTraxx Main was up at 70.5bp (+1.5bp) and X-Over at 292bp (+7bp).

Back again tomorrow. Have a good day.

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.