7th December 2017

It’s all about the Bitcoin

MARKET CLOSE:
iTraxx Main

48bp, -0.5bp

iTraxx X-Over

234bp, -1.2bp

10 Yr Bund

0.29%, -1bp

iBoxx Corp IG

B+98.9bp, unchanged

iBoxx Corp HY

B+300.85bp, +2.5bp

10 Yr US T-Bond

2.33%, unchanged

FTSE 100 , DAX , S&P 500 ,

But CoCo – born to be wild…

We really should take a moment and eulogise about what has been a fantastic year for a corporate bond asset class which was deemed rich when we started out in 2017. It got more expensive as the year progressed and few have been deterred even so. The flow of external money went mainly into IG funds, but it has been invested in greater proportion in higher beta assets and the squeeze in anything with yield has been unprecedented.

Cash indices have tightened by between 30 – 50%. Of course there is a crash or correction of sorts coming, there always is. But it doesn’t look like it is anytime soon and positioning conservatively for it this year would have been very painful in terms of performance. Those who did, would have quickly changed strategy.

US equities have romped to the top of the charts, but the contingent convertible corporate bond market has run it a close second – without exhibiting much of the same concerns about valuations looking toppy, because the CoCo structure works so long as the financial system doesn’t crash.

The primary markets have belatedly offered plenty by way of new deals, as it worked in fits and starts until the summer. Non-financial IG issuance levels looked like falling well short of its recently established high standards, but a decent October and November of deal flow has corrected any short falls. The high yield market is in record-breaking territory – and has been since October, for supply in any given year (well over €70bn issued). It has been the chief beneficiary of the ECB’s QE purchase programme resulting in funding costs for borrowers at record low levels, while receptivity to deals and the asset class overall have never been as effusive as it is at the moment.

Rich? Yes, by all historical standards, but we are in a new economic reality (inflation, growth, the economic cycle and rates) and the systemic liquidity always needs a home. Hence, bubbles are created.

Lower growth levels will not burst the ‘bubble’, merely serve to inflate it more because policy would need to stay accommodative in some shape or form for longer. The trigger for a crash will be an unforeseen crisis. Failing that, we might just play out in rangebound fashion in credit for a while. In that sense, the credit market has taken a back seat of late.

For the moment, Brexit is on the front pages of the financial press. US tax reforms are, too, with hopes of some meaningful agreements serving to propel US equities higher into record territory. We also have more commentary of some sort of looming event-risk that will lead to a financial crisis – it’s just that no one knows when – apart from some time in the distance future, like H2 2018!

But we do now have investors seeking glory in the next ‘big thing’. Bitcoin. In a volatile session, it added a stunning $2,000 to trade somewhere well north of $17,000 a coin (as at the time of writing). There was a (spurious) spike in the price to $19,000 in there somewhere too!


Good time to get a deal away

It’s not exactly busy, so getting a deal on the screens now leaves the borrower in the market unopposed, with the full attention of the investor. Schneider Electric issued a 9-year deal for €750m at midswaps+27bp which was 13bp inside the opening guidance off a book almost 2x oversubscribed. Austrian utility OMV got a better reception as it also plumped for 9-year funding finally priced 20bp inside the initial mumble at midswaps+40bp for the upsized €1bn of proceeds. The book was at €3.75bn.

In the high yield market, Pro-Gest priced it’s €250m 7NC3 deal at 3.25%. And we were awaiting over €1bn of deals from PVH and Schenck Process to be priced, as well as Friday’s Burger King 2-part PIK note offering. Excluding those deals, issuance in HY this year is now at €74bn.


Almost everything rallied

Thursday’s pre-FOMC session saw everything rally. US stocks were generally higher for the three bourses (S&P, Dow, Nasdaq) and European equities also traded through a positive session. The FTSE was lower.

Rate markets enjoyed a better bid too, with the Bund yield on the 10-year benchmark a basis point lower at 2.29%, BTPs were yielding 1.68% (-4bp) and Bonds 1.41% (-3bp). US Treasuries were flattish, the 10-year left to yield around 2.32%. 10-year Gilt yields moved 2bp higher to 1.25%.

With the market in this positive mood, credit enjoyed a better session of it, too. The iTraxx indices did not sell off much through Wednesday’s weakness, and so the rally was also limited on Thursday. That left Main just 0.5bp lower at 48bp while X-Over declined to 234bp (-1.2bp).

In the cash market, there was nothing doing and we closed unchanged leaving the Market iBoxx IG index at B+98.9bp. The drop in the underlying is helping to keep total returns in the black in the early stages for this month, while spreads are unchanged in the opening week. High yield spreads leaked again, 2.5bp wider on the iBoxx index to B+300.25bp. They have now backed up by 50bp since they reached those record tight levels a month ago.

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.