- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
|🇬🇧 FTSE 100 6049.62, (-1.73%)||🇩🇪 DAX 12489.46, (-0.04%)||🇺🇸 S&P 500 3152.05, (-0.65%)|
Christmas can’t come quick enough…
Ouch! No – not Brexit, but the German economy. It contracted by 0.2% in Q3 versus Q2 as export markets flagged. And while that was enough to fret about, we also had the Italian government’s response to the European Commission’s demand that they rein in the spending as presented in the budget. Well, the Italians decided to defy the Commission, play hardball and will not change their fiscal stance.
So while markets didn’t really feel impacted much by the UK/EU Brexit agreement, it felt a little heavy after those German GDP numbers and Italy’s defiance (which actually came overnight). It’s turning out to be a tough November for the Brussels bureaucratic machinery and we all know they are going to play it by the book. It is a process, after all.
That means that the ECB will most likely still go ahead with closing out its €15bn of monthly QE purchases come year-end. Unless, of course, global macro takes a serious nosedive. They will take note of the Eurozone’s industrial production figures which for September show that output declined by 0.3% versus August, and October’s numbers will be equally as poor. Growth in Q3 came in at 0.2% for the region (versus +0.6% for the UK, by the way). A lot is blamed on the auto industry but there is much more to it than that.
It also means that Italian risk premiums are going to rise. The response generally to the news was actually quite contained, with 10-year yields up at 3.48% (+3bp) – off the session’s highs and still some way off the year high of 3.78%. Some will necessarily look at the spread versus Bunds which rose to around 308bp, but it is still a wobble away from the 2018 high of 335bp.
We would say that the BTP/Bund will head in that higher direction over the course of the next few months, and headline risks will keep investors away from Italian fixed income risk assets (government and corporate bonds). the Italian stock market was the chief underperforming one in the session.
Time to wind one’s neck in
Mid-way through November, and it looks like it really is time to shut up shop for the year, with some defensive strategies needing to be put in place. For credit investors, that might mean take some risk off the table, hedge out with CDS or take a duration view. Defensive is the name of the game. There are just three weeks of primary business to get done and there won’t be too much (Takeda’s jumbo aside). Secondary isn’t going to help out in any way. There is not going to be a decent bid worth its salt, while the offered-side will also be less appealing.
The numbers aren’t great, but fixed income (and credit in particular) is the winner thus far. For example, in the 3-month period to end of October, IG cash, as measured by the iBoxx index, lost 0.4% in total returns and the index widened by 9bp. The biggest IG Euro funds lost anywhere between 1% – 4.5% in the same period, highlighting the level of risk (beta) in those portfolios.
For high yield, the 3 months to end October saw spreads in the HY iBoxx index to move 34bp wider, while returns came in at -1% in the period. The larger HY euro-denominated funds delivered anywhere between 0% and -4% in the same period. For both markets, there has been a further moderate deterioration in both spreads and returns.
In the same 3 month period, the Dax lost 7.5% and the FTSE declined by 4% with both indices at or a little lower since. Credit has outperformed… all year.
For the year to date, credit in IG has returned -0.9% while the HY market has lost 1.3% – both market clearly outperforming Eurozone equities by a massive margin (Dax -11.5% and the broader €Stoxx50 returning -8%).
Midweek lull totally understandable
Wednesday’s session might have been an ideal time to get a deal in. Admittedly the mood was mixed if not sombre, but we could have taken down better deal flow than what was offered. The potential for Takeda Pharmaceutical pulling the trigger on Thursday is going to close the market for others for the rest of the week, given the size of the deal being touted. And Stryker Corp’s multi-tranche deal will likely dominate next week.
So only French toll-road operator APRR was in the market with a €500m long 11-year at midswaps+53bp, which was an aggressive -17bp versus IPT with orders reduced once the deal was ratcheted tighter resulting in books at under 2x subscribed (was over 3x). Greed wins out.
Equities started the session on the back foot, clearly ruffled by the weak German GDP Q3 data. But they regained their poise to trade higher before US equity weakness left European bourses in the red at the close by up to 0.6% (€Stoxx50). Rates were slightly better bid to unchanged, with the Bund yield at 0.40% (unchanged, 10-year) and Gilts yielding 1.50% (-2bp) – both for different reasons. The 10-year US Treasury was unchanged at a yield of 3.15%, at the time of writing.
There was little happening in credit otherwise. The iTraxx indices closed amid some catch-up driven (overnight) weakness with Main left up at 72.9bp (+1.9bp) and X-Over at 300.3bp (+6.5bp).
In the cash market, the iBoxx IG index closed at B+148.5bp (+2bp) and to the widest level in over 2 years. As for high yield, the index popped higher too, to B+444bp (+7bp) in a more measured move it would seem. Illiquidity has its advantages. Sometimes!
Have a good day.
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