17th April 2018

It must be a relief rally

MARKET CLOSE:
iTraxx Main

52.6bp, -0.8bp

iTraxx X-Over

267.8bp, -3bp

10 Yr Bund

0.51%, -1bp

iBoxx Corp IG

B+103bp, -0.6bp

iBoxx Corp HY

B+312bp, -1.5bp

10 Yr US T-Bond

2.82%, -1bp

FTSE 100

,
DAX

,
S&P 500

,

Because macro isn’t improving…

Uh oh… The signs are there, the Eurozone is slowing sharply and we might ultimately be heading into recession territory for the region. The ZEW index, a measure of economic confidence in the German economy fell to -8.2 in April and to the lowest level in over five years. Add into that the weak Q1 reports taking in industrial activity, exports and consumer growth, then the German economy – long seen as the engine for growth for the whole of Europe, is slowing sharply.

The ECB has a real job on its hands now.

Up: GDP growth for China (so they tell us)

The central bank has removed some stimulus by reducing their monthly QE related purchases and is looking to reduce them further come September – while governing council member Ewald Nowotny talked recently about being comfortable in raising the deposit rate (from -0.4% to -0.2%).

Oil prices are up by an average of almost $10 versus only just five months ago (+$30 in 9 months) adding to tighter policy elsewhere – just as we head into a potentially serious global trade war.

China might have recorded a higher-than-expected GDP growth rate of 6.8% for Q1, although there is always a ‘but’ with their numbers – in terms of the air of suspicion which has always surrounded the figure. Here, these early days of the current slowdown come as the Eurozone economy has barely broken 2% in GDP growth. The US is tightening policy with two or three rate hikes pencilled in for this year, while the Eurozone’s export sector faces ongoing tariff uncertainty.

Much of the volatility in the market has come from geopolitical events in these opening months. That was lost on us in Tuesday’s session with just about everything rallying. Equities were trading the earnings season as they pushed any apprehensions aside. European stocks are in the red year to date – but after Tuesday’s rally could be looking at getting back to flat soon. Government bonds have been better bid too. Rate markets might have had the 10-year Bund yield closing in on 1% a couple of months ago, but that benchmark yield looks anchored to a 0.5%-handle.

As for credit, this market seems to have got its mojo back only very recently but would be vulnerable to a sharp economic downturn, although well-placed to weather a shallow one. Such fine margins.


What warning signs?

Well, the warning signs are being flagged, but someone has forgotten to tell that to equity markets. We had yet another solid day in the US and a super day across Europe. Goldman Sachs and J&J did most of the heavy lifting in terms of sentiment, while Netflix delivered in the previous evening. The S&P and Dow rose by 1% (at the time of writing) and were sitting in the black again year-to-date having had a solid opening session to the week the previous day. And all that came just as industrial production for March slowed to 0.5% from 1% in February, although it beat the 0.3% expectation.

In Europe, the Dax added 1.6% and is now less than 3% away from recovering this year’s losses (it has been almost 9% lower). Other European stock markets were adding up to 1%. Back int he US, the Vix index (volatility gauge) has dropped again to trade off a 15%-handle.

So while equities were enjoying their day in the sun, there was support also for government bond markets. Maybe they are playing to the tune of macro. Yields declined a touch across the board. The benchmark 10-year Gilt yield declined to 1.44% (-2bp), the Bund to 0.51% (-1bp) and the US Treasury yield edged one basis point lower to 2.82%.


Credit primary slows a little

The primary market was still churning out deals, but it wasn’t the busiest of sessions for corporate bond deals. In IG non-financials we had Sydney Airport reduce initial guidance by 15bp to print €500m in a 10-year at midswaps+80bp – and was the sole representative in this sector. That’s only two IG non-financial corporate deals this week following on from the HeidelbergCement transaction on Monday (€750m). We’re looking for EP Infrastructure to possibly print on Wednesday, amongst others surely.

Elsewhere, we had a senior deal from the high double-B rated Banca IFIS for €300m while KBC took €1bn in a PNC7.5 AT1 offering with a 4.25% yield which was 37.5bp inside the opening guidance. It is worth mentioning that the Republic of Indonesia issued €1bn in a 7-year at midswaps+115bp, off a book just shy of €4bn. In the real estate sector, Grand City Properties sold €350m in a PNC5.5 hybrid bond priced to yield 2.875% (-25bp versus IPT).

In high yield, OCI NV priced deals in dollars and euros. The Dutch-based fertiliser group issued €400m in a 5NC2 deal to yield 5% (as well as $600m/5NC2/5.625%). Japan’s Softbank Group was also funding in both those currencies, issuing (approx, to be priced at time of writing) €1bn in a 5-year at a yield of 4% and (approx) €500m yielding 4.5% in a 7-year maturity.

In the synthetic markets, protection costs fell again into the improved general tone, leaving iTraxx Main at 52.6bp (-0.8bp) and X-Over at 267.8bp (-3bp).

As for secondary cash, it was always going to be better bid but only edged tighter amid the usual low flow and volume regime we’ve all become so used to. The Markit iBoxx IG cash index edged lower to B+103bp (-0.6bp) while the HY index managed to tighten by only 1.5bp to B+312bp – which nevertheless is 25bp inside the 2018 wides seen at the beginning of the month.

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.