10th January 2018

It’s a funny little place…

MARKET CLOSE:
iTraxx Main

44.8bp, +0.8bp

iTraxx X-Over

230.5bp, +3.8bp

10 Yr Bund

0.48%, +1.5bp

iBoxx Corp IG

B+91.2bp, +0.1bp

iBoxx Corp HY

B+276.3bp, +2.6bp

10 Yr US T-Bond

2.56%, +1.5bp

FTSE 100 , DAX , S&P 500 ,

Markets speak with forked tongue

Too many people are looking for a financial markets collapse. And then will come the ‘I told you so’. Others think one is coming, but don’t know when, but keep adding risk just in case they get left behind in the ongoing rally. We don’t think it is coming until everyone has thrown in the towel and is completely uncomfortably long. Or we get that global event which causes a financial markets meltdown. After all, it’s not as if we’re buying corporates that are generating no profits as presaged the Dot.com financial crisis.

It’s not as if we have not enough money flows into foreign sovereign markets where governments are trying to sustain rising current account deficits (that is, the 1997/8 Asia crisis). Nor do we have a structured product boom creating a financial nirvana that sustains risk asset prices at elevated levels and costs at low levels forever (the root of the current crisis).

The odd hiccup – be it financial or geopolitical – won’t be the triggers, as we have seen these past couple of years. We do, though, have high and likely unsustainable debt levels which are currently being serviced with relative ease because of low interest rates. The point of the current measured policy response (gradual tightening) is about recognising the need to maintain financial stability (and not choke off growth) by maintaining the world’s ability to service its obligations, but also to convey a message that tightening is coming. That is, to try to deflate the current multitude of asset bubbles gently. We have these seriously high levels of indebtedness borne in part as a result of the crisis and partly by China’s (and others’) breakneck expansion, essentially catalysed by the low-rate regime.

The market pops if rates go too high too quickly. Bear market for government bonds? Maybe. We think that the central bankers are playing a blinder at the moment as they manage expectations – quite aggressively at times (ala Draghi). Unfortunately (?), the preponderance of liquidity is still resulting in asset bubbles being created (crypto) and/or inflated further. More fuel is added to the fire largely by the exuberance emerging from of the trillion dollar plus boost that the US economy is about to feel from Trump’s tax reform. “It” won’t end well. History tells us that. But just as we question when, the answer is ‘unlikely in 2018’.


Primary still firing on all cylinders

2018’s first corporate hybrid bond came from Engie

Protestations in some quarters of a bear market for government bonds (weakness in US Treasuries would be felt in other rate markets), are falling on deaf ears.

In Wednesday’s session, we had €4bn issued by Portugal in a 10-year maturity offering (on an order book of over €17bn), a stunning €9bn from Italy in a 20-year deal with demand at over €30bn, while the EFSF garnered orders of over €10bn for a €6bn final print.

In the corporate world, the non-financial IG sector was graced by ASF (Autoroutes du Sud de la France SA) which came with a €1bn offering in a 12-year maturity finally priced at midswaps+35bp, and 15bp inside the initial guidance on books of €1.5bn. FCA Bank issued €850m off a €2.3bn book, in a 3.5-year FRN format priced at Euribor+33bp (-17bp versus IPT). France’s Engie issued the year’s first corporate hybrid bond, in a PNC5.25 structure priced to yield 1.5% for €1bn.

The day’s deals takes the issuance total to €12.85bn in these opening couple of weeks.

Specialist property group Aroundtown Property was back (they were quite prolific borrowers in 2017), and also issued a hybrid deal for €400m, in a PNC6 deal at midswaps+200bp (-20bp versus IPT).

In financials, Caixabank lifted €1bn in a long 5-year, CBA took €750m in a 10-year maturity while BFCM was back but in sterling for £450m. That’s a meaty €12.75bn issued in the senior bank market and we’re not even two weeks into the new year.


Credit holds its ground

Well, finally we had a down day, as some of the recent zippiness around the market faded. Eurozone stocks lost up to 0.8%, the FTSE was in the black by a small amount and the US markets saw up to 0.4% of losses at the open before fighting back to close around 0.1% lower..

Government bond markets were not better bid, though, as some voiced concern about valuations as we potentially head into a bear market for them. The outperforming sector was the Gilt market with the market close to unchanged and the 10-year yield at 1.28%. US Treasuries were the stand-out obvious weak market as the 10-year yield rose to 2.58% (+3.5bp), before a good 10-year auction helped them recover to yield 2.56%. The equivalent Bund yield also rose just 1.5bp to 0.48%.

For the credit markets, the risk proxy iTraxx synthetic indices edged higher. Main was up 0.8bp to 44.8bp while Main gave up almost 4bp to close at 230.5bp.

In the cash market, the focus was just about all on the primary markets. However, the session’s general weakness or wariness about the current level of risk market pricing fed into secondary valuations as well. The weakness was limited though, with the cash IG Markit iBoxx index barely moving, left at B+91.2bp (+0.1bp). Noise.

Higher yielding assets also maintained their stability and broad support, the CoCo sector barely moved in the session, and the index was just 3bp wider at B+344bp – which by the way is just 5bp off the record lows recorded on Friday last week.

As for the corporate high yield market, we are still to see a deal get printed in primary this year, and the weakness in this market was also very limited amid little flows and volumes in secondary. It left the iBoxx HY index a touch higher at B+B+276.3bp (+2.6bp).

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.