- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 (live)
||S&P 500 (live)
Defeat from the jaws of victory…
It felt like a twin-pronged attack on the markets as Yellen’s warning on asset price valuations and Draghi’s Eurozone reflationary comments almost carried through another session. Added to it was a little spice from the BoE’s Governor as he suggested rates could rise if business investment picked up.
It seemed that equities would have to complete another down day on the back of euro/sterling strength against the dollar, while rate markets also came under pressure again after a decent pull-back on Tuesday. That rate market jitter comes just as fixed income markets were about to record some stellar gains for June and indeed, for the first half of the year!
This is unlikely going to be the case now especially as, for example, 10-year Bund yields have risen almost 15bp from their lows earlier this week. The same can be said for equities but the severity of the loss in performance will be much less. Corporate bond returns across the board – euro IG, sterling IG and high yield – will have dropped as the spread recovery is nowhere near enough to offset the move in rates.
So, a healthy reassessment – or something more sinister?
This is always going to be the question the market asks and trades, even if we have had more false dawns than we can care to remember over the last few years. What worries the market is that there has been much talk already around asset price exuberance (and Yellen gives it credibility), while the Eurozone heading for a reflationary phase feeds into possible ECB taper talk as we naturally assume some kind of recovery is taking hold.
Eventually, that means in the US equities may well have peaked while in the Eurozone government bond yields need to go considerably higher. The former will impact valuations here and invariably impact also the willingness of investors to want to add risk. It looks like suddenly becoming a long summer.
While the debate rages, we have some volatility borne from the uncertainty of it all. But, eventually, a semblance of calm that meant European equities had another slightly weaker session on Wednesday. With US stocks flying in the session (up around 1%), we could be up for some sort of recovery in Europe on Thursday.
The main focus of our attention was on duration markets. During the session, the yield on the 10-year Bund touched 0.41% before settling 2bp wider at 0.37% (but played out in a 9bp range in the session), and Gilts of the same maturity saw yields up at 1.16% (+7bp) after those comments from Carney.
Credit markets were calmer with not even moderate weakness in synthetics (iTraxx/CDS), while cash markets were holding relatively firm at or around the tightest levels seen for 2017 (or record tights for HY).
We would think the recent market jitters suggests that the market is sensing an inflexion point around policy, equity valuations, growth dynamics and inflation – and for sure we’re seeing some nervous price action into it, as investors try to gauge the direction and outcome of it all. It could well be a long summer ahead of us.
Primary offers yielder risk
While markets try to find some sense of direction which might be sustainable, primary kept churning out deals, with a little bit for everyone in the session. There was a higher yield flavour to the deals too. We were flush with SSA offerings, but only two non-financial IG deals.
The first came from Tauron Polska Energia for €500m in a 10-year maturity at midswaps+163bp and some 17bp inside the initial guidance. The other was a senior secured deal from Heathrow Funding also for €500m in a 15-year maturity.
The more interesting deals came from Wagamama Finance in the sterling markets for £225m in a 5NC1.5 senior structure to yield 4.125%, while Raiffeisen Bank issued an AT1 to yield 6.125%. Swiss Re was out in dollars for $650m in subordinated format to yield 4.625%. Finally, French REIT Altarea took €500m in 7-year senior funding and paid midswaps+200bp for it.
The €2bn of IG non-financial corporate issuance takes the deal total for the month to €29.2bn and with Legrand amongst others likely on Thursday, we’re going to see out the month somewhere north of €30bn in issuance.
Credit calm as rates come under pressure
The synthetic iTraxx indices edged a little lower in the session with Main at 54.3bp (-0.3bp) and X-Over at 236.8bp (-0.7bp) suggesting the fundamentals for credit are only going to improve if recovery sets in – and that these will override any concerns we might have around valuations in equity markets (for the moment anyway).
As for the cash markets, secondary was slightly better bid leaving the Markit iBoxx index for IG cash credit at B+112.5bp (-0.5bp) and setting a new low for 2017 for this index. IG sterling closed unchanged. Finally, the HY market was a tad better offered amid little volume going through, leaving the index at B+296bp (+2.5bp).
On a housekeeping note, a prior engagement means there will be no daily on Friday. Back on Monday. Have a good day.
For the latest on corporate bonds from financial news sources, click here.