27th September 2017

Market regaining its poise

MARKET CLOSE:
iTraxx Main

57.5bp, -0.8bp

iTraxx X-Over

254.4bp, -2.4bp

10 Yr Bund

0.47%, +6bp

iBoxx Corp IG

B+107.2bp, -0.6bp

iBoxx Corp HY

B+282.6bp, -3bp

10 Yr US T-Bond

2.30%, +7bp

FTSE 100

7,314, +28

DAX

12,657, +52

S&P 500

2,509, +12

The trend is still your friend…

Another dull session was about to pass us by, but markets were cock-a-hoop about Yellen’s overnight hawkish musings on the US economy and the prospect of rate increases. The Fed is happier with the state of the US economy and a hike in December in now a nailed-on certainty. At the open, the 10-year Treasury yield jumped 7bp to 2.30%, the equivalent Bund yield saw 0.48% (+7bp) and Gilt yields rose 6bp to 1.39%. Most had already pencilled that hike in, so the moves seem overdone. All things being equal there will be several more to follow in 2018, in addition to the Fed’s $4trn balance sheet reduction trade. Can we relax now?

2018 promises to be what 2017 ought to have been. Most just all called it a year too early. We still have a quarter of this year to play out and rate markets will react to an impending December rise. Also, investors will start to position for 2018. A feature for fixed income this year has been the flattish performance of Eurozone government bonds where the prospect of rate hikes in the US through the year have been offset by the multitude of event risks.

Credit markets have done way better than expected with performance levels in both spread and return terms at the top end of the most bullish of forecasts. Rate market moves ought to remain limited from here through the final quarter, we believe. We still don’t think the 10-year Bund yield will see 0.70%, or that the equivalent US Treasury will see north of 2.60% by the end of this year.

What this does mean is that corporate treasury functions might need to have a closer look at their funding requirements. We suggested in Tuesday’s comment that most will be aware that rates are going higher in 2018, but few IG non-financial corporates are currently willing to pull the trigger ahead of that rising rate cycle. The level of IG issuance has not hit the heights we might have thought for this month and while HY supply has been more effusive, we are not inundated with deal flow.

There is also a huge amount of sidelined cash looking to get involved, while there are significant inflows still into IG funds too. The ECB’s tapering will eventually remove the market’s largest ever manipulator away from supporting spreads, leaving corporate bond investors to handle the reality of higher growth, rising rates, perhaps rising inflation – and a better place to invest money than in corporate bonds.

That’s going to be something to think about for 2018, maybe for the second half of that year. For now, we focus on hanging on to what we have got and maybe taking a more high beta (yielding) position as a buffer against any moderate rise in rates and/or spread weakness through the final few month of this year.


IG non-financials issuance is back!

Deal time: Total took €1.5bn in deals

IG corporates came up with the goods in Wednesday’s session lead by a dual tranche offering by Total SA. The French oil group took €500m in 7-year funding and €1bn in a 12-year transaction, managing to reduce the initial price talk by 10-13bp. Banque PSA funded at midswaps+48bp for a 5-year €500m deal – and reduced that initial pricing guidance by 22bp.

Finland’s Huhtamaki Oyj came with a smaller deal for €150m in a 7-year maturity at midswaps+112bp (-23bp versus IPT). Although unrated, we would probably think the corporate would scrape an IG rating. Finally, CPI Property issued €600m at midswaps+175bp in a 7-year deal (-25bp versus IPT). There were some interesting deals in there and higher yielding ones at that within the IG universe.

The total IG issuance – after €2.25bn in the session – is now up at €25.8bn, for the month to date. Our target was always €30bn+ for September, which is now unlikely to be met in our view, with just two sessions remaining.

Staying with the higher yielding debt issuance theme, ABN AMRO made a rare foray for them into the markets, with a €1bn PNC10 AT1 deal priced to yield 4.75%.


Risk assets prices rise

A reminder, if ever we needed one, around single name event risk came in the form of Canadian group Bombardier, after news overnight that the US intends to slap huge tariffs on the aircraft maker’s UK exports to the US. Cash bonds were around 4c lower in the session. Overall though, the session was a positive one for risk assets. Equities in Europe were on the front foot for a change on currency weakness leaving bourses anywhere between 0.4 – 0.8% higher, and outperforming US markets.

As suggested previously, rate markets had a more difficult day of it, with yields on most benchmarks ending at or close to their session highs.

In credit, primary helped focus most investors. The synthetic iTraxx indices moved lower with the better tone generally for risk assets leaving Main at 57.5bp (-0.8bp) and X-Over 254.4bp (-2.4bp).

Finally, in secondary cash, a light session still saw spreads marked better and left the Markit iBoxx index at B+107.2bp (-0.6bp) and the usual higher beta sectors/bonds were the ones which outperformed. Sterling spreads were better too, the tightening of 0.4bp on the cash index overall (G+134.2bp) enough to record the tightest level for this month. No Brexit, rate, Labour conference policy/rhetoric fears here.

In high yield, the market was better bid – or just easier for the Street to mark prices higher into the positive tone. The Markit iBoxx index closed at B+282.6bp (-3bp). More of the same, we think, on Thursday.

US stocks were closing in on new, fresh record highs. Thursday ought to be a positive day for risk.

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.