12th June 2017

Let it shine

iTraxx Main

58.3bp, -0.5bp

iTraxx X-Over

240bp, -0.5bp

10 Yr Bund

0.25%, unchanged

iBoxx Corp IG

B+119.2bp, -+xbp

iBoxx Corp HY

B+317bp, unchanged

10 Yr US T-Bond

2.20%, unchanged

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Corporate bond markets still shining

Tennet: 2 green bonds printed totalling €1bn

Well, that wasn’t very exciting with markets caught up in the headlights of that tech sell-off from the back of last week. There was a bid for government bonds though and nowhere more apparent than in Italy, as electoral reform and an early election were both deemed unlikely (this year), and so the built-in premium for BTPs has eroded in spectacular style, almost.

The 10-year yield has dropped to 2.01% (-7bp) having been as high as 2.28% a week ago. Equities were in the red but the 0.3-01% range of declines across Europe were fairly measured in the context of that 1.8% decline in the Nasdaq last Friday. The FTSE was at least trading close to flat, buoyed by the weaker currency making sterling assets more attractive in relative terms.

As for credit, we’re not thinking about rich valuations and caution. Nor are we thinking anything around which might lead to an all-out assault on this market. There have been many false dawns of a material sell-off leading to something more sinister for valuations since this crisis began in 2008, yet the asset class has remained resolute throughout. High yield spreads, for instance, are now are at record tights.

In IG, there is a bit more work to do, but we have spreads converging on record tights. Demand is solid and, we would argue, supply could be a lot higher (given that level of demand), but it is keeping investors interested in just about any deal – or every deal – given the need to get some risk on board.

We’re needing a global financial crisis to see the corporate bond market even threatened. That’s because the asset class has managed to retain fairly favourable metrics from a credit quality viewpoint, with just about every corporate entity refinancing through these crisis years with less costlier debt. Who wouldn’t? There is still much cash on balance sheet and the ability of the corporate sector to service its obligations is still the best it has ever been.

Geopolitics have played their hand and we’ve sailed through all the event risk they might have thrown at us. The economy in the Eurozone is looking perkier with each economic data print, while we know the ECB will stay accommodative – for what seems like forever – so long as inflation stays so low. The US is sputtering, but the tightening cycle there is also extremely measured.

So, global macro is supportive for corporate bond markets – low rates, low yields, low default rate and an economy blowing neither too hot nor too cold. And we feel more comfort in that rate markets haven’t seen government bond yields head to the moon. They tried to at one stage in Q1, but they’ve pulled back with yields residing at the lower end of the ranges established over the past 9 months.

Corporate bond purchases drop a touch

Having accumulated €1,516m of debt two weeks ago, the latest ECB data showed that the central bank had lifted €1,421m of IG non-financial corporate debt last week (see chart, below). A few weeks ago that was €2bn+ per week and the accumulation is becoming very unpredictable.

ECB weekly purchases

That said, the total purchases to date, after 53 weeks, stand at €92,127m, with the long-term weekly average of purchases at €1,738m. And in line with our comments above, it highlights how (crowding out in IG) and why (low yields) the ECB’s purchases have managed to have a disproportionate impact on spreads/yields in the high yield corporate bond market.

Primary disappoints

With the Fed just around the corner, we could have expected a decent amount of primary activity on Monday as some borrowers look to fund ahead of the rate announcement. But no such luck, as just a handful of borrowers chanced their arm.

In a rather unspectacular session therefore, we had only Tennet in the IG sector with a couple of green bonds for a combined €1bn. In the REIT sector, we had Hemso Fastighets in for €300m in 12-year funding while the high yield market was occupied by Globalworth Real Estate in for €550m in 5-year funding to yield 3%. And finally, for the insurance sector AIG sold €1bn in a 10-year deal.

We are holding our breath, because we expect a busier session Tuesday.

As a reminder, we’re up at €12.8bn in IG non-financial supply and a not-to-be-sniffed-at €2,875m in the HY market. That takes the high yield YTD issuance total to €28.6bn and a run rate which if maintained would see us achieve a record year for this market.

Technology sell-off bites again

The Nasdaq had another down day and that just served to keep European stocks under pressure. The Dax was off almost 0.9% and the CAC over 1%. Government bonds got a better bid behind them, just, but the main moves were reserved for OATs (because of Macron’s expected parliamentary landslide victory) with the 10-year yield down at 0.60% (-4bp) and Gilts were yielding 0.97% (-4bp). Bunds close unchanged to yield 0.25% and treasuries were also close on unchanged (2.20%, 10-year).

Given the moves in the stock markets, one would be forgiven in thinking that credit – as seen through the eyes of the indices – would be weaker. But alas, the iTraxx indices moved lower with Main at 58.3bp (-0.5bp) and X-Over at 240bp (-0.5bp).

The cash corporate bond market served up the usual low flow/volume Monday session, and spreads were as close to unchanged as we might have expected. That all left the Markit iBoxx IG index at B+119.2bp (unchanged) while the sterling market edged a tad better to G+138.1bp (-0.2bp). Finally, the high yield market – closed unchanged with the index left at B+317bp (a record low, by the way).

On a housekeeping note, there will be no note on Wednesday due to a previous commitment. 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.