20th January 2019

Markets have their mojo back!

MARKET CLOSE:
iTraxx Main

76.2bp, -2.3bp

iTraxx X-Over

321.2bp, -8bp

🇩🇪 10 Yr Bund

0.26%, +2bp

iBoxx Corp IG

B+171bp, -2.5bp

iBoxx Corp HY

B+496bp, -5bp

🇺🇸 10 Yr US T-Bond

2.79%, +4bp

🇬🇧 FTSE 100

7436.64, (-0.58%)
🇩🇪 DAX

13664.00, (-0.91%)
🇺🇸 S&P 500

3373.23, (-0.70%)

And credit shakes-off its New Year hangover…

Following a relatively inauspicious start, corporate bond market investors have got their trotters on and their zest for risk. It’s been a delayed reaction for investors to get involved and the small amount by which they are, is enough to have spreads start to claw back those earlier New Year losses. IG spreads are back to flat for the year. There might be something in it that primary, while up and running, hasn’t been as effusive as many would have thought. Or, we haven’t yet had that ‘jumbo secondary repricing’ deal which has all and sundry running scared. Whatever, there has been an abrupt turn in spread direction following several sessions of stability following some significant weakness. Most risk markets are showing positive returns so far this year, and now credit is, too.

We’ve had a few hairy moments when last year’s weakness just continued amid positive equity markets – and while it is only early days, investors do get concerned. IG credit has since recovered total return losses of -0.3% to now show returns at +0.2%, the CoCo index is up 3% and the HY index +1.6%. Primary has just done enough to help tip the balance a little towards feeling a little light and thus supporting secondary valuations. All of a sudden, there is a squeeze in spreads on.

Investment grade spreads are now tighter for the year by 1.5bp after a 7bp recovery last week (iBoxx index), but HY spreads are 28bp tighter and the CoCo index is a massive 90bp tighter.

The demand for paper has been huge, in primary anyway. Last week’s Engie deal for €1bn managed to garner a book of over €6bn. The PNC6Y1M green hybrid deal did offer a 3.5% coupon in an era where yield on quality names is in demand. The French utility managed to get 50bp lopped off the initial pricing for the privilege. GM also chipped in with €750m of its own off a book exceeding €3bn with final pricing of midswaps+200bp for the long 5-year, which was some 25bp tighter than the initial guidance.

The key takeaway is that higher beta corporate risk, from relatively solid names where the coupon offers a decent pick-up, is meeting with some good demand in these early sessions. Rates are not going much higher anytime soon while economic cliff risk is still relatively remote, supporting the tweak towards higher beta positioning – especially subordinated bank paper.

That is, we are weighing up the weak macro environment and the impact that might have on specific securities and/or sectors/asset classes versus the need for higher-yielding products, as the underlying market yields are so low and are set to remain that way.


Reduced primary boosts valuations

So primary is very well bid now, new deals are generally managing to tighten on the break amid the improved tone and it is infectious on secondary as that market manages a leg-up. All the pieces are falling neatly into place. The new issues are not coming thick and fast amid the improvement, and that will be helping.

So far in January, IG non-financial issuance sits at €13.8bn and somewhere in the €20bn – €25bn is now likely for the full month. Mind, last week only had four borrowers (FedEx, Enel, Engie and GM) for just under €3.5bn, but we did have some Brexit jitters to contend with, which served as a distraction.

Senior financials have delivered €14.3bn of deal flow this month so far, with 3 deals last week for €3.3bn. January is nearly always the heaviest month of the year for senior bank issuance and we must be looking for upwards of €25bn of issuance this month.

Telecom Italia Mobile: Alone in HY for Jan so far

Unfortunately, the high yield market is in a real rut for the moment, but we dare say it will see a good recovery, assuming risk market hold up for a while longer. Confidence is everything for high yield primary.

The sole borrower this month is Telecom Italia Mobile which issued €1.25bn and even then it is a blue chip borrower with a high double-B rating. There is a considerable pipeline, issuer refinancing risks are low given the low ‘wall of funding’ but market receptivity will depend on the prevailing mood.


Kicking off on the front foot

The markets rallied hard in last week’s final session, all on hopes that there might be some kind of truce or a scaling back in US-imposed import tariffs on Chinese goods. The hopes for an easing in trade tensions left the Dax as the chief beneficiary in equity markets as the index rose by 2.6% alone on Friday. It is now up by over 6% already this year. Of course, German industry has the most skin in the game and the most to gain/lose in Europe on any trade war.

Otherwise, the news flow was mixed, but generally better. As well as hopes on this trade talks, Kim Jong Un’s top aide was in the US for further talks and US industrial production rose by more than expected in December (and recorded its biggest gains in 10 months). The government shutdown and stock market weakness, however, left consumer sentiment in December at the lowest in over two years.

The rally in equities (S&P +1.3%) finally saw a reversal in the bid for safe-havens. The 10-year Bund yield rose to 0.26% (+2bp) on Friday and was 8bp higher in the week. Hopes of some kind of soft Brexit reduced the lure of Gilts, and the 10-year yield rose to 1.35% (+7bp last week). The 10-year US Treasury yield also saw its highest level for this year, rising to 2.79% as it closed last week.

In Europe, the main news flow took in Telecom Italia’s profits warning for 2018 results, and we had the Bank of Italy suggesting that the country had fallen into a technical recession in Q4 (after -0.1% growth in Q3). The central bank was also lowering its GDP growth forecasts for 2019 (to 0.6% from 1%) and 2020 (0.9% from 1.1%). We think that there might be further revisions (lower) to those numbers in due course.

In credit, protection costs took another tumble, iTraxx main down at 76.2bp (-2.3bp) while X-Over fell to 321.2bp (-8bp). That’s 4.4bp and 13bp tighter, respectively, in the week.

As for the cash market, the bullish mood pulled credit spreads tighter for the year as the squeeze in spreads saw the iBoxx IG cash index 2.5bp tighter at B+171bp. The HY index tightened by 6bp to B+495bp and the CoCo index crunched 22bp tighter to B+621bp.

That positive close last week ought to feed into credit markets retaining an upbeat start this week – and primary should be the main beneficiary. We should anticipate some corporate deals even if Monday’s are usually quiet. The window will be open and investors – as judged by the previous flows, will be receptive.

The earnings season moves up a gear as the likes of Ford, J&J, IBM and United Tech all report. We have the World Economic Forum in Davos – without an official US administration representation. The ECB wraps us up on Thursday with no changes expected on anything apart from some additional caution on the macro view.

Have a good day.


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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.