24th April 2018

Inflexion point for risk assets

MARKET CLOSE:
iTraxx Main

55.5bp, +0.3bp

iTraxx X-Over

275.8bp, +0.4bp

10 Yr Bund

0.63%, unchanged

iBoxx Corp IG

B+102.5bp, -0.5bp

iBoxx Corp HY

B+311.5bp, -0.9bp

10 Yr US T-Bond

2.99%, +2bp

FTSE 100 , DAX , S&P 500 ,

Mixed fortunes…

We hoped that this week might have sizzled, pouring with deals ahead of an anticipated quieter last couple of days into (and after) the ECB meeting/announcement and then that important macro data (US GDP and core PCE). But no.

We’re scraping the bottom of the barrel for corporate bonds in secondary as well as primary. We had the now daily obligatory IG non-financial (non-government owned) corporate issue, and that was about it. Equities continue to slip and slide and then regain their composure, bond yields are going higher and finally, after having waited for more than four years, US Treasury yields hit 3.00% in the 10-year benchmark. Credit is stuck in the middle – unmoved.

And it’s all because we are all contemplating the severity of the financial crisis to come (higher rates, EM collapse, funding/debt refinancing crisis), maybe just a shallow recession or if we are very lucky, perhaps just a moderate slowdown which takes in most of 2019 – but begins towards the end of this year. Elsewhere, the Brexit debate is ramping up again and appears to be all one-sided with the ECB not giving anything up. The German Ifo index confirmed that business sentiment had weakened in April (102.1 versus 103.3 in March) and corroborated the data of late suggesting some trouble-at-mill for Germany AG.

With just several sessions left before we close out this month, credit has managed a decent recovery – well, most markets have. IG spreads, as measured by the Markit iBoxx index have tightened by almost 6bp to B+102.5bp, but are still 6bp wider for the year so far. As for total returns, the index shows that they have dropped a little this month as rates have sold off, leaving us with returns at -0.6% for 2018.

The picture is a little better in the high yield market. Deals are flowing and there is some confidence in the asset class – probably because there is a good deal flow. iBoxx index spreads have tightened 25bp this month so far, but are also 25bp wider year to date. The front end of the rate market is a little less under pressure versus the longer end, and that has helped total returns. Returns so far this month are +0.6% and for 2018, they are also in the black, at +0.15%. Both markets have spent this year mostly in the red in the 0 to -1% range.

Having said that, equities had also been having a slightly better time of it. Into the close on Monday, the S&P had recovered 30 points this month and was just about flat year to date – before losing those gains on Tuesday by a similar margin! The Dow was up 330 points and had recovered to be off 1% this year also before losing the advantage on Tuesday in spectacular fashion (-500 points).

Meanwhile the Dax has made up 550 points to claw back losses to -2.3% for 2018. In the rate market, Eurozone government bonds have lost 0.6% so far in April, but that should come as no surprise given the recent rise in yields. For the year so far, they’re still in the black, returns up at +0.75%. That might look a little different on Wednesday.


Primary slows some more

Philips went it alone in IG non-fins with two deals

The deal flow saw only Philips for IG non-financials, which came with a dual tranche offering for a combined €1bn. There was a €500m issue in a 6-year maturity at midswaps+25bp priced 15bp inside the opening guidance and the same size in a 10-year at midswaps+45bp – also 15bp inside the initial guidance. Order books were at a combined €2.8bn.

China’s 100% government-owned State Grid Corporation issued 7-year and 12-year maturity debt for €500m and €350m, respectively. The tranches were priced at midswaps+75bp (-20bp versus IPT) and midswaps+100bp (-30bp versus IPT), respectively off a book at just over €1.8bn – with no doubt much price insensitive domestic interest/support for the deal.

Senior financials had Norwegian savings bank Sparebanken Sor issue €300m in a 3-year floater, while unrated but implied high yield leasing group Sixt issuing €250m in a 4-year maturity transaction yielding 1.75%.

As for the amount of issuance we have had this year, we now have IG non-financials up at €14.5bn for April – and a paltry €69.5bn this year, which is 25% down on the opening four months of last year. High yield issuance is up at €7.6bn for the month (€26.8bn year to date) and corresponding senior financials figures are at €11.9bn (€62.7bn).


Secondary credit bucking the trend

The 10-year US Treasury touched 3.00% for the first time since early 2014. It had the effect of dragging Bund yields up to 0.65% (+2bp) and Gilts to 1.56% (+2bp) during the session even as the UK government borrowing requirement came in at its lowest annual level (year to end March) since before the crisis in 2007. There was bit of a bid into the close and the Gilt closed unchanged to yield 1.53%, the 10-year Bund at 0.62% (-1bp) while the US Treasury yield dipped back below 3%.

The US Treasury market and the direction of it will be the one that all will focus on, because US monetary tightening will have an impact on dollar debt (and other) markets everywhere. Emerging market borrowers have been looking on, in some trepidation, we would think with some pressure already being felt as spreads widen.

Equities in the US received a bit of a boost at the open from a strong spate of earnings from the likes of Harley Davidson, Coca-Cola and Caterpillar. They were eventually trading in mixed fashion, small up or down and lacking direction – before ending sharply lower! European stocks didn’t get a leg-up in any way and managed to move slightly lower with the Dax again the underperformer in the session.

Meanwhile, Brent was up at $75 per barrel after Trump’s latest spat – this time with Iran, branding the Iran nuclear deal ‘insane’ and warning the country not to resume its nuclear programme even if the US pulls out of the deal which limited Iranian activity. It was back below that into the close trading off a low $74-handle.

In credit, the synthetic indices were close on unchanged in the session, with Main at 55.5bp (+0.3bp) and X-Over at 275.8bp (+0.4bp).

And then there was the secondary cash market. It surprised in being slightly better bid for choice. The lack of material levels of supply might finally just be having the desired and expected impact on secondary valuations. Tighter. After all, the demand is there, and while few are chasing it – including the ECB now, we think it’s all enough for the Street to tighten up the market. It left the iBoxx index at B+102.5bp (-0.5bp).

Finally, the high yield market has been in good shape of late and it also managed to gain a better bid, leaving the index at B+311.5bp (-0.9bp). Small moves, but encouraging nevertheless.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ 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 CreditMarketDaily.com.