- by Suki Mann
iTraxx X-Over Index
10 Yr Bund
iBoxx Corp IG
iBoxx Corp HY Index
10 Yr US T-Bond
First hurdle is a slow burning fuse …
With just two sessions to go before we close out the month, only a few will contest that the month hasn’t fared as we might have expected. President Trump tops the list of events – or ‘event risk’ – which might have had the markets jittery at times and having to handle a period of uncertainty. The pre/post-inauguration leaves the markets little wiser.
Executive orders are being signed in double-quick time. Article 50 is due to be triggered but the political shenanigans in the UK have been much of a sideshow to events in the US. We would think that the market reaction has been both predictable and, overall, constructive.
Equities are on a high (expecting spendthrift governments) anticipating an underpinning of current positive growth trajectories, even if economists in some quarters are suggesting a slowdown as the year progresses. After all, renegotiating trade deals as America “gets smarter” – to coin a Trump phrase – might represent some headwinds if the barriers to indeed go up. It was Mexico last week, Canada and China loom large while there’s bound to be something happen between the US/Eurozone, in due course.
Fiscal profligacy means more borrowing, and government bonds have had a bad time of it of late. German 10-year Bunds are up at close on 0.50%, the 10-year Gilt yields 1.50% while the potential for an Italian election has seen yield on 10-year BTPs shoot past 2% to 2.23%. The rise in underlying yields has eaten into fixed income returns, while the equity markets deliver more comfortable January returns so far of, for example, 1.7% for the Dow and 3% for the DAX.
In credit, spreads are tighter this month as better growth dynamics justify a tightening in them, while we have had little by way of outflows – and those inflows and bond redemptions need investing. The ECB has been lifting more than usual too. So, spreads tighter (considerably in HY), but returns for euro IG and £ IG are in the red, while the shorter duration HY market is closing in on 1% of total returns for the month.
It’s effectively been a risk-on January.
Primary fizzles out…
There were no HY deals last week, and we have had just €2.235bn this month so far. The HY market in secondary has been the outperforming credit market this month and we would have expected borrowers to feed off that better tone.
But just four borrowers have, and one of them – Telecom Italia – could be viewed as being more attractive and perhaps deserved of being effectively viewed as an IG borrower. That issuer raised €1bn, so just €1,235m from the other three represents slim pickings.
Still, secondary valuations have improved on the lack of issuance and upbeat macro. The Markit iBoxx index for HY is 30bp tighter for January.
We drew a blank on Friday in IG, leaving the week to deliver €6.1bn of deals from just five issuers although Deutsche Telekom was responsible for €3.5bn of that total in a three tranche offering. The monthly total – with two sessions still to go – stands now at €25.6bn, which comes in at around the level we expected. there are two sessions to go before we close out the month, so another €1-3bn is quite possible.
The stand-out deal in senior issuance last week came from Santander with a non-preferred benchmark transaction, ahead of this type of instrument being rubber-stamped from a regulatory perspective both domestically or from the EU. It will likely happen, and the Spanish borrower was just trying to get ahead of the curve as well as gain a little kudos for doing so (also being the first non-French issuer – where regulatory approval has been granted).
Secondary credit spreads on the move
The markets should now settle, having had a taste of what to expect from the White House’s new incumbent. But just when we think it’s plain sailing, we have the FOMC and non-farms to look forward to.
Fortunately, we and most believe the Fed will stay put, save for a continued upbeat assessment of the economy which will have the rate-wallahs pondering the number of rate moves higher the Fed might partake in 2017. 172k is the market consensus for payroll additions, while the average hourly earnings increase might be the figure to watch out for (inflationary pressures).
Europe closed out a touch weaker last week in credit, albeit in a quiet session where the Street chose to take a defensive stance in case anything untoward came across from the Trump-May gathering.
The Markit iBoxx IG index is now at B+133bp (+0.75bp on Friday), having tightened a basis point in the week and is 3.5bp better in the month. The equivalent sterling corporate index is at G+148.75bp and unchanged last week, but 3bp tighter in the month. The top of the performance pile is HY market (as mentioned above), after 30bp of tightening this month and 7bp last week to B+373bp. That has already passed our full-year target!
The synthetic indices closed a little wider with Main at 70.5bp (+0.75bp) and X-Over at 293bp (+3bp) and these levels were 1.5bp and 8bp wider in the week, respectively.
We think more of the same is likely this week. The earnings season will be in full swing, but we can expect quieter climes into the FOMC and NFP report. Apple, Pfizer, Exxon are among those US companies reporting this week, while in Europe, we have the likes of Daimler, DT and Metro AG. Month-end valuations and the like will also keep a few sidelined and/or distracted.
The interesting development now will be on where rate markets head. Yields have backed-up a fair bit already in these opening weeks of the year. Much more, and we will be revisiting our expectations on a number of macro variables and indicators for the full-year (rates, returns, growth, inflation).
That’s it. Back tomorrow.