19th April 2017

Letting the people decide – again

FTSE 100
7,148, -180
12,000, -109
S&P 500
2,342, -7
iTraxx Main
77bp, +0.3bp
iTraxx X-Over Index
299bp, +5bp
10 Yr Bund
0.15%, -3bp
iBoxx Corp IG
B+132.5bp, +0.5bp 
iBoxx Corp HY Index
B+381.5bp, +0.5bp
10 Yr US T-Bond
2.17%, -8bp

Yet another election

Unelectable? Corbyn’s Labour

What a start to the week! The political maths has it that the UK’s Conservative Party will soon have an overwhelming majority. Prime Minister Teresa May has called a general election – and it promises to be one of the most exciting ones that the UK has ever faced.

This has Brexit written all over it – and it is a potential poke in the eye for the rest of the EU which was doing its level best (or promised) to extract a better deal for them. Not now.

Admittedly, the domestic opposition is weak and there is much opportunism in the move. Labour under Jeremy Corbyn is unelectable while Farron’s Liberal Party might be one of the winners. The interest lies around how die-hard Labour EU Leavers cast their votes. Abstain or plump for the LibDems because they will find it hard to vote for the Tories.

Where do die-hard Tory ‘Remain’ voters cast their ‘X’? They will stay with the Tories but we think a small proportion will choose to go with the LibDems. In Scotland, May has nothing to lose and everything (or perhaps a little) to gain.

The timing of the UK election is the worst possible as far as the EU elite is concerned because should May increase her slim majority (likely), she will go into the Brexit negotiations massively emboldened with a stronger mandate. In our view, the strengthening of the UK’s hand going into the Brexit negotiations is what this election is about – and the best deal possible for the UK.

The shortened week should have been dominated by this weekend’s first round of voting in the French elections. The race, according to the polls, has tightened with around 4% of voting intentions separating the top four candidates – and that’s all within a margin of error. That means it promises to be a nervous few days for OATs and a few will likely reduce French corporate bond risk too (and/or buy single name protection against some of their positions, of they haven’t already done so). That’s the predictable part. The outcome on Sunday evening is anything but – although the second round result might be (we think!).

Election fatigue hits markets

€750m AT1 deal for Santander

Jittery markets had the UK equity, bond and sterling currency markets in volatile form through the session. UK 10-year yields dropped to 1.00% before rising back to 1.05% (+1bp) and closing at 1.01% (-3bp). The FTSE 100 was weak at the open, but still dropped by almost 2.5% while the currency rose, cable to $1.2734 (+1.6%). The positive, we would think, is that little ought to change as far as UK politics is concerned from a policy perspective. Also, we don’t believe the result of the election will have  material impact on asset valuations – not in credit anyway.

Anyway, it was just as well that we had this call for an election, because the session was an otherwise empty one. There was little happening – understandable given how gripped we all are by geopolitical risks (we can throw Turkey and North Korea into the pot). Primary credit was closed but there were a couple of mandates being awarded in sterling.  We did get a €750m AT1 deal from Santander, however, which printed to yield 6.75%.

New issue markets have failed to offer much this month and one would hope that it is geopolitical event-risk driven and once those French elections are out of the way, that issuance dynamics will resume normal service. Just €5.3bn of IG non-financial debt has seen its way on to the screens this month so far.

And all this comes while the ECB has been lifting near on €80bn of debt over the past year or so, funding costs to get deals away remained at close to historic lows, we have failed to see any noticeable uptick in issuance (ECB’s QE corporate bond raison d’être after all) and spreads have barely tightened.

ECB just €438m short of €80bn

The latest ECB investment grade, non-financial corporate bond purchases came in at a massive €1,692m and was a drop of €723m versus the prior week – but in line with the long-term weekly average.

Recent ECB weekly purchases

The total purchases to date, after 45 weeks, stand at €79,562m – and this is debt that will be held by the central bank until it matures (over 13% of the eligible market). The long-term weekly average accumulation of corporate bonds is now €1,768m.

Geopolitics: The bond market’s best friend

Measuring the market’s ability or willingness to take risk or not can usually be gauged through the government bond markets and we had the 10-year Bund yield (the ultimate risk free measure/asset) lower at 15bp (-3bp) while OAT yields also dropped to 0.89% for the 10-year maintaining the difference between the Bund at around 74bp. Only a few months ago, many were looking for the 10-year Bund yield to see 0.75% – and we haven’t even seen 0.50% this year. We have sustainable growth, a bit of inflation and the ECB reducing by 20% its overall monthly bond purchases – and yields heading lower. Who would have thought that?

Equities declined across the board with investors now likely getting fatigued by the continued and heavy geopolitical risks. The DAX was off 0.9% and US stocks were also in the red, but less so.

In credit, the obvious weakness was evident in the synthetic iTraxx indices with Main up at 77bp (+0.3bp) and X-Over at 299bp (+x5p). The cash market was very quiet, while a defensive bid was in evidence by the Street as we might have expected. There was no sign of panic – again as we might have expected. Returns popped higher as the underlying rallied. That left the cash representative of the corporate bond market – the Markit iBoxx IG index – just 0.5bp wider at B+132.5bp while the sterling corporate market widened by a basis point for the equivalent cash index and is now at G+154bp.

Finally, the high yield market was also a little weaker and that left the iBoxx index at B+381.5bp which just 0.5bp wider – and so an outperformer in the session.

Overall, these were very modest moves and there might be some more of a follow through in today’s session.

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.