11th May 2017

Lies, damned lies… and then there’s politics

FTSE 100
7,385, +43
12,757, +8
S&P 500
2,399.6, +3
iTraxx Main
62.2bp, unchanged
iTraxx X-Over Index
252.9bp, +0.6bp
10 Yr Bund
0.42%, -1bp
iBoxx Corp IG
B+114.5bp, -0.4bp 
iBoxx Corp HY Index
B+320.4bp, -2bp
10 Yr US T-Bond
2.40%, unchanged

But this market is not for turning

“You’re fired”

We had a stark reminder that political event risk stays high on the agenda.

The sacking of FBI Director Comey by President Trump was a bolt out of the blue. A new low even by US political standards, we dare say there is a whole lot more (scandal?) to come on this story/presidency.

We wouldn’t say the market took it in its stride, but the reaction was relatively muted given the potential for quite significant consequences a little further down the line. And that lack of market concern (and persistent low volatility) might be a red flag moment for some, but it is difficult to trade against it.

We seem to have sailed through so many potentially difficult and unexpected situations – be they around Brexit, Trump’s election success and perhaps less so the French elections – so why not another one? We suppose that the point here is that the sacking of the FBI’s director has broken new ground and has the potential to unravel rapidly (or otherwise) possibly leading to an eventual impeachment. There would be a major market reaction should that happen!

As for now, the US dollar might have felt a little hot under the collar, but equity markets were relatively stable and actually ended a touch higher, government bonds were left to trade only a little better although the bid was clear and yields declined a touch. Credit spreads were close on unchanged amid investor focus on the primary market.

Primary flatters, even if the numbers impress

BMW chipped in with a £250m deal

And here it threatened to burst into a flood of borrowers looking to get deals away, except we had just one IG non-financial corporate – albeit a 4-tranche blockbuster from General Electric. But it was somewhere to park up some cash in an issuer seen as one of the safest-of-havens of the corporate bond market.

The rest saw some issuance in financials, SSAs and sterling corporates again. We don’t think that the overnight news from the US was responsible for the fairly limited session given the lack of follow through into the broader market valuations.

Anyway, GE took centre stage, unopposed as the sole IG non-financial borrower in the euro-denominated market. The issuer printed €8bn across 4 tranches across 5-year, 8-year, 12-year and 20-year maturities taking an impressive 15-20bp off the initial guidance for each of the deals. It might seem a little harsh to suggest, but we don’t think primary particularly flattered in the day – we certainly weren’t excited by it.

That €8bn from GE was a tremendous amount of bonds in non-financials on any given day, but it was just from a single borrower and low beta one at that. And a lot of the spread was taken out of the transactions into final pricing. A juicier set of deals would have been much more welcomed.

Still, the deal takes the monthly supply now for investment grade non-financials to €12.2bn (and to over €100bn for the year to date). In sterling, we had more supply following-on from the steady slew of deals already issued this month and this time it came from BMW which opted for a 4.5-year maturity £250m deal.

Other deals had senior efforts from Goldman Sachs (€2bn), Caixabank (€1bn) and BNPP (€1.25bn) for a combined €4.25bn in a heavy day for senior financial deals. Insurer Vivat NV printed €650m in a 7-year deal.

We still drew a blank in the high yield market, and only Norican has ventured out for this sector this month (€340m).

Risk assets play it cautiously

As we might expect, the US political machinery took centre stage and meant for a more limited session as markets digested the news and potential ramifications. We started in very cautious mood, and there wasn’t any noticeable risk-on flavour through the session with equities generally ending just around unchanged.

For bond markets, governments were a touch better bid, leaving the 10-year Bund to yield 0.42% (-1bp) while any Macron Presidency-related enthusiasm has left us, with OATs underperforming and the yield between the Bund and 10-year OATs rising to 42bp. Gilts were around unchanged to yield 1.17% (10-year).

In credit, we don’t think that big multi-tranche deals like the one we observed yesterday from GE have the potential to unnerve the secondary market. A similar day of supply from several different issuers might, though, because the quality of yesterday’s borrower fills many different pockets.

For instance, the cash Markit iBoxx IG corporate bond index ended 0.5bp tighter at B+114.5bp which was a new low for 2017 ( and just 20bp off the record low for the index). The better tone for credit was replicated in the sterling market as well, with the index down at G+141.7bp (-0.3bp) and another 10bp grind tighter would set a new 10-year low for this index.

For high yield, the cash index recorded a level of B+320.4bp which was 2bp tighter in the session with just another 2bp of tightening needed to get to a 10-year low for this index – and in our view for the HY market ever (more on this in a later comment). The current level takes us to being 94bp tighter this year so far!

Finally, the iTraxx indices were more representative of the broader geopolitical concerns, and closed unchanged with Main at 62.2bp and X-Over at 252.9bp.

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.