17th March 2019

Half time – and it’s game on

MARKET CLOSE:
iTraxx Main

60bp, unchanged

iTraxx X-Over

268.5bp, -1bp

🇩🇪 10 Yr Bund

0.08%, -1bp

iBoxx Corp IG

B+140.7bp, -1.5bp

iBoxx Corp HY

B+436.6bp, -3.3bp

🇺🇸 10 Yr US T-Bond

2.60%, -3bp

🇬🇧 FTSE 100

7409.13, (-0.58%)
🇩🇪 DAX

13744.21, (-0.01%)
🇺🇸 S&P 500

3380.16, (+0.18%)

Credit parties like it’s…

We’re at the halfway stage for the month and just a couple of weeks away from the corporate bond market seeing out the first quarter – and in fine form. Unbelievable as it might be, we need a double-take at the performance it has delivered for investors, who had been very apprehensive going into the new year.

Worry not. Deals have gushed as the sluice gates have opened, buoyed by a lower rate regime coming on the back of what looks to be a protracted economic slowdown. The ECB and other central bank policies will need to remain accommodative for longer – with additional measure likely – as they push on that string and try to contain/prevent macro-event cliff risk. That vulnerability in the economy suggests that we’re going to see much of credit in 2019 (if not all) play out like 2016/17.

That goes for credit in both IG and HY. Incredibly, IG cash credit (iBoxx index) has returned 2.4% in the year to date, with 0.6% of that coming this month. IG spreads since January have tightened by 30bp and demand for deals has been incredible and sustained, witnessed by last week’s €1.1bn dual-tranche offering from Marsh & McLennan which saw a combined orderbook of €10bn!

The CoCo market ought to have been beset with problems – or we would thought it might have been – by an issuer non-call (from Santander). While the economics didn’t work for the borrower, the markets have brushed it aside. Other borrowers have had little trouble accessing the market since and Unicredit saw huge demand for its deal last week, as yield-hungry investors lapped-up the offering. The 7.5% coupon for the €1bn offering might have had something to do with it. It’s no coincidence or surprise that returns in the AT1 index have shot to 5.5% year to date on spreads 140bp tighter.

The macro slowdown is supposed to reduce the attractiveness of the high yield market, for fear of an increasing default rate as event risk rises for an asset class so dependent on top line growth to help facilitate its ability to service obligations. Nope. Returns are up at 4.5%, the index has tightened by 77bp and almost belatedly, we’re seeing a few more deals emerge in primary.

In 2016, IG returned 5% and HY 11% although from a much higher base, while in 2017 they returned 2% and 6%, respectively. Somewhere in the middle for 2019?

Primary has been gushing too. The ECB isn’t directly involved anymore, the massive demand is coming from real money investors. New issue premiums are flat. The market has readjusted now that it is no longer being manipulated by the central bank.

The non-financial IG market saw issuance of €74bn in Q1 2016 and €88bn in the same period in 2017. Last year in Q1 saw just €54bn of deals while this year, with two weeks to go before we get to quarter-end, €70bn has been issued. So it looks as if we’re going to somewhere in the region of €80bn which also pitches us neatly in that 2017/18 dynamic.

The high yield market is more of a mixed bag when comparing. In Q1 2016, little over €5bn got away while in the record-breaking 2017 year, the opening quarter saw over €16bn of issuance. This year hasn’t been great compared to the previous two, but we have still managed almost €10bn of issuance. Somewhere of the order of €45-€50bn is possible this year, should current market conditions be maintained.


Politics broken

The UK political make-up is no longer left versus right or rather the Conservatives versus the Labour Party and/or the Lib Dems. It is now split on Leave/Remain Brexit lines. The incredible scene of Brexit Secretary Barclay passionately supporting the government’s motion last week – and then openly voting against the particular motion says it all. The next election may well be fought on these lines and the suggestion is, that it possibly brings a new political force into Westminster.

And of course, an extension of 3 months might be the most desirable one. If PM May resigns and we can get a new PM to negotiate with the EU from a different perspective. Anything longer than that, then European politics gets very messy as the UK will most likely have to (and will want to) contend the European elections due in May.

The markets will play out another week to the next and final vote on Theresa May’s deal, although the broader situation around the US/China talks will likely trump the debate in the UK. If anything emerges. That certainly was the reason for the rally in equities, for example, as we closed out last week’s final session with some vague talk of a breakthrough in negotiations.

This doesn’t really have too much to do with the credit market directly, but the changing and evolving political situation does have an impact on markets through the uncertainty it introduces. Usually and foremost it is felt in the most liquid market of them all – equities – but the reverberations can filter through into credit. Thus far, credit has more been about macro, primary, inflows needing to be invested and risk on into a weaker economic environment.


Weak data, trade talk hopes

We closed last week with another couple of key data points highlighting the fragile nature of the US economy amid a slowdown in industrial production and manufacturing activity. The former rose just 0.1% against expectations of 0.4% in February – against a decline of 0.5% in January. The latter saw New York activity slow to its weakest in two years.

Treasuries rallied. Stocks gained on hopes of that US/China trade breakthrough. The yield on the 10-year Treasury declined to 2.60% (-3bp). Rates were better bid in Europe too with the 10-year Bund yield closing the week at 0.085% with the Gilt left to yield 1.21% (-1bp). As for stocks, the FTSE was up 0.6%, the Dax 0.8% and US markets gained 0.7% or more.

In credit, the synthetic indices closed unchanged with Main at 60bp and X-Over at 269.5bp (-1bp) amid little activity. The high yield primary market had the Power Solutions deal priced as the borrower took an increased €700m in a 7NC3 senior secured deal priced at 4.375%.

The cash market in secondary was quiet, but it did have a better bid about it as we might expect given the rally in equities. The IG iBoxx cash index closed at its tightest level of the year at B+140.7bp (-1.5bp) – which takes it to around 32bp tighter year to date. The bid for the AT1 market was a little less firm, but the index managed to tighten by 4bp to B+566bp – equalling the tightest level this year.

The high yield market also edged a little tighter and the index closed at B+436.7bp (-3.3bp) – also the tightest level for the year.

This week will be dominated by Brexit again, with vote number three due on Tuesday, which comes ahead of the EU Council meeting on 21/22 March. The Fed is up on the 20th and we must be looking for no change here with any further rate rises still some way off, especially after some of the recent data (non-farms included). The BoE hooks up on the 21 March, and it’s a given that the MPC will decide to keep it all as it is – no change.

Have a good day.


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.