7th November 2018

Lame duck… ‘ish

MARKET CLOSE:
iTraxx Main

67.2bp, -2.4bp

iTraxx X-Over

280.3bp, -5.3bp

🇩🇪 10 Yr Bund

0.45%, +1bp

iBoxx Corp IG

B+141.4bp, -1.7bp

iBoxx Corp HY

B+419bp, -6bp

🇺🇸 10 Yr US T-Bond

3.19%, -2bp

🇬🇧 FTSE 100 6104.73, (+1.71%) 🇩🇪 DAX 13066.54, (+2.36%) 🇺🇸 S&P 500 3431.28, (+0.67%)

But no calamity…

Trump: Loser?

The markets liked it.  Reigning in the President got the thumbs up. The runaway express is coming under some control. There will still be executive orders, but likely no more tax cuts and the like. Growth and inflation, therefore, might moderate as any additional expansive economic policies fail to see the light of day. So both rates and equities had reason enough to see the bright side emerging from the gridlock at the heart of the US Congress. And it just might save the month in terms of performance, though likely has come a little too late for some markets to fully recover all of their losses to date.

This is all about relief for the moment. A moderation in US growth and inflation, with protectionist policies in place and unchanged, are not going to augur well for global markets. The potential for a weakening backdrop to growth in 2019 is likely to continue, though, even if US domestic political risk might start to wane.

However, we can now get on with the business of doing some business. Equities in Europe added a useful 1% and duration was flat to generally better bid. EM had a better day of it on dollar weakness while even Turkey’s rehabilitation continued as the sovereign managed to get a deal away in the euro debt markets, following up from the foray in the dollars last month. It’s only one session, but the hope must be that the recoveries have some support behind them.

Unfortunately, the deals in the primary credit world were SSA and covered bonds, with plain vanilla corporate offerings drawing a blank. We could have expected a borrower to take advantage of the better tone and get a deal on the screen opportunistically and unopposed. No such luck, and so the dearth of deals continues.

In a classical sense that lack of deal flow, allied with a more positive tone for risk assets through this month, ought to help to push spreads tighter. Although secondary market liquidity is a busted flush, we could expect investors to try and lift some paper that might emerge. But it is going to depend on the tone of the market – and also the considerable obstacles in the way which might prevent us maintaining any momentum.

For instance, it doesn’t help when Eurozone macro is weak (Eurozone retail sales flat in September vs August and down 0.8% YoY). Nor does it help that we still have to look forward to the European Commission/Italy budget coming together next week.

But Eurozone economic weakness will be felt more in 2019, rates in Europe should remain at or around these levels, while equities have a good chance of trading a touch higher into year-end. There might be some volatility on headline risks coming from the Italian budget jousting, but not enough to derail the broader markets – just yet.

We are steering towards thinking the credit markets being slightly better bid into year end. The squeeze in spreads might just have started.


The market likes it, at least

Higher equities, a weaker dollar, US Treasuries a touch better and a feel-good tone rippled through the market. It’s helpful too that volatility declined (as measured by the VIX index).

The S&P added 1.65% in the session (at the time of writing and was up at 2,800 again), which represents a 5% recovery from the recent 2018 lows seen just 2 weeks ago! We closed out in Europe with the Dax up 0.8% and the FTSE up 1.1% – both a little off their intraday highs.

In rates, 10-year Gilts closed unchanged (yielding 1.53%), the US Treasury was yielding 3.19% (-2bp) and Bunds were actually slightly better bid to yield 0.45% (+1bp).

Credit in Europe just needs borrowers to like it. The window is open. The earnings season blackout period is no longer an impediment to getting a deal out. It’s tempting to think that confidence might be back, too – but we’ll need to see how events play out the rest of this week just to be sure.

Legal & General took £400m

There were deals in the session, with Turkey’s euro deal and Legal & General’s sterling transaction the picks of the bunch. The UK insurance giant took £400m in a Tier 2 (30NC10) priced at G+365bp which was 20bp inside the opening guidance and off an excellent £2.25bn book. Turkey printed €1.5bn in a long 7-year costing them 5.25% and garnering interest for over €4.5bn.

In the high yield corporate market,

As for the synthetic indices, protection costs went with the risk-on tone and was better offered (lower) as a result. That meant iTraxx Main managed some good tightening, closing at 67.2bp (-2.4bp) while the X-Over index moved 5.3bp lower to 280.3bp.

In cash, the mood was better as well but, as ever, activity was stifled by the poor liquidity in secondary. It helped generate a decent squeeze, though, and the IG iBoxx index managed to tighten by 1.7bp to B+141.4bp. Having hit a multi-year high of B+602bp almost two weeks ago, the CoCo index fell for an 8th consecutive business session, now at B+535bp.

In the high yield market, Intertrust Group BV became the first deal this month, as it priced €500m of 7NC3 notes at 3.375%. The better mood in the market helped prices move higher, and the iBoxx HY index spread 6bp lower at B+419bp.

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.