28th February 2017

March on

FTSE 100
7,253, +9
11,823, +19
S&P 500
2,370, +2
iTraxx Main
74bp, -1bp
iTraxx X-Over Index
294bp, +-2bp
10 Yr Bund
0.19%, -1
iBoxx Corp IG
B+137.5bp, -0.3bp 
iBoxx Corp HY Index
B+378bp, -1bp
10 Yr US T-Bond
2.37%, +5bp

After some relief in February…

An average Monday in February is wasn’t. The corporate bond markets played out the penultimate session of the month with some gusto, amid a plethora of deals that whetted the appetite. In addition, the month has been nothing short of fantastic in terms of performance and recovery. More of that below. Renault, Vodafone and Coca-Cola kept the IG market busy while ThyssenKrupp and Rexel added to the HY supply – although the German steel giant would have solicited much interest from the IG fraternity.

Vodafone’s €1bn was eclipsed by Coca Cola’s deals

And the French were in combative mood. Business sentiment there and in the Eurozone ought to have provided fuel for equities to rally (they were only marginally higher though), but we saw a bit of a push for OATs to recover some more of their previous losses. What election jitters? 10-year OAT yields dipped below 0.90% to eventually close yielding 0.87% and the spread versus Bunds dropped to 68bp, some 20bp off the recent highs.

Mixed data from the US (durable/capital goods report and pending home sales lower) failed to offer the markets much upside into the afternoon session.

As noted in yesterday’s comment, we’re still looking like closing this month out in good form, where for fixed income markets it has been about recovery after a dire January. Equities will have managed to hold gains – and improve on them in many cases, leaving us to ponder whether to stick or twist in March. Had we ought to be wary of the potential for a sell-off and get a little defensive? – Also, are current strategies for corporate bond market participants (adding risk mainly through primary) the way to play it; or do we go for broke?

Surveying the potential hiccups, we still have an unreadable US President potentially throwing the hugest spanner in the works. There are the French elections that will have much focus, while the Dutch elections are due in a couple of weeks, too. We would think that there is enough in that concoction to warrant and justify the current modus operandi in the investment process.

Play it relatively safe – with the herd, in primary. We still like risk, nonetheless. We still prefer €-denominated corporate bonds versus US$, would take a slightly longer duration versus benchmark position and have some additional beta in there versus the benchmark.

ECB doing its level-headed best

The ECB announced that it had purchased a reduced (versus the previous week) €1,675m of non-financial IG debt last week (see chart, below), taking their total purchases to date after 38 weeks to €66,646m. It is still an impressive haul and we think that it has massively contributed to curtailing much volatility in asset valuations of the corporate bond market. It may not have contributed to spreads going tighter, but it may have stemmed the weakness in spreads versus government bonds.

Recent ECB weekly purchases

The total accumulated is still around 10% of the eligible market and implies an average weekly hoard of €1,754m in IG non-financial euro corporate debt since they began operations. Roughly 14% of the purchases have been in primary.

Primary opens the week with a flourish

It seems that we’re opening the week and ending the month in primary with a flourish. We were graced with deals galore in the non-financial area. In investment grade, that meant we had Vodafone with a long 4-year maturity deal for €1bn and 12bp inside the initial price talk and Renault with a 6-year deal some 22bp inside the opening guidance for €750m (on a near 4x book).

However, it was Coca-Cola who grabbed the headlines with a 3-part offering raking up €2.5bn for the privilege for a 2-year floater and 4-year & 7-year fixed deals. In total, we had €4.25bn of issuance taking the sum total with one session to go before we close out February to a more respectable €18.6bn.

The high yield market also had a decent day, although as suggested above, the ThyssenKrupp deal would have had keen interest from IG funds. The German steel giant took €1.25bn in a 5-year deal on books approaching €5bn and managed to take 23bp off the pricing (midswaps+137bp) versus the initial guidance. Rexel was the other high yield rated borrower in the market with a €300m 7.25NC3 deal, taking the total month-to-date issuance to €3.77bn, and we can expect more today.

And into the final session we go

The 10-year Bund yields 0.19% and the equivalent Gilt 0.15%. A month ago, that was 0.48% and 1.48%, respectively! The data have been good (US, UK, Eurozone) and we have the potential for a rate hike at the next Fed meeting, so we should not have seen that move in government bond yields. So it must be that Trump’s rather unpredictable reign has been enough to see safe-havens react, while more recently there might be something added from the Eurozone’s election season. Whatever, when those month-end marks go in this evening, returns for fixed income market investors are going to look much more comforting versus what we recorded at the end of January.

In credit, the market was better bid for choice and that slightly better bias for risk allowed the Markit iBoxx index to tighten a touch to B+137.5bp (-0.3bp). The focus was clearly elsewhere. Likewise, the sterling market also edged better, but there was little activity into it. As for the high yield market, again there was little activity but the market closed a touch better, the cash iBoxx index at B+378bp (-1bp).

And finally, iTraxx Main closed at 74bp (-1bp) and X-Over at 294bp.(-2bp).

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.