2nd November 2017

Markets react to being dumbed down

MARKET CLOSE:
iTraxx Main

49.8bp, unchanged

iTraxx X-Over

225.2bp, +1.5bp

10 Yr Bund

0.37%, unchanged

iBoxx Corp IG

B+95.8bp, unchanged

iBoxx Corp HY

B+256bp, -1.5bp

10 Yr US T-Bond

2.35%, -3bp

FTSE 100

7,380.68, -6.26
DAX

12,993.73, -53.49
S&P 500

2,578.85, -6.79

By adding a little bit more…

The best we could say about the market right now is that it embraces a reflective mood – thinking about the FOMC just gone, the earnings season, the next catalyst to push us higher, the next Fed chairman, Trump’s tax reforms and more immediately, today’s non-farm payrolls.

At least we had some better activity across the primary market after what seems like an age with several session of little or no supply – or nothing to inspire anyway. Eurozone equities gave a little of the previous day’s gains back, rate markets were still treading water and credit was unchanged to better bid for choice, where the squeeze in spreads is taking us deeper into record territory. That systemic event risk – likely the only thing that can derail the markets – delivering a knockout blow to investors who are just as long as they can be, is seemingly as far away as ever.

As we move into the penultimate month of the year, investors across all asset classes have had a good year with lots of performance coming as we entered the post-holiday period from September. The economy keeps it all ticking over, but there is the odd moment where we doubt the longevity or sustainability of the current recovery.

Along with the persistent low levels of global inflation, the rate markets have been reacting into that air of uncertainty. Hence, government bond yields have failed to sustain a meaningful trend higher and are stuck in the middle of the ranges established this year. Most forecasters got their rate forecasts completely wrong this year – but, there’s always next year! We think equities can power on especially if Trump manages to get his tax reform agenda through largely as reported, because the next leg of the upswing in US stocks (global too for that matter) might well depend on it.

Credit spreads will continue to squeeze. There’s little to stop them. We are not getting enough issuance at the moment and that might start to concern some investors. The vagaries of year-end investing – cash needing to get invested – are necessarily going to see some chase an illiquid secondary market.

The greater illiquidity in higher yielding debt (HY and CoCos) is going to leave us with a disproportional tightening trend here and these markets will likely be the outperformers over the next few weeks. They’ve tightened hard since the beginning of September already. For example, the Markit iBoxx CoCo index is 120bp tighter in spreads and 110bp lower in yield in two months – and that is almost 40bp for the high yield index, for both measures.

Mind, the non-financial corporate hybrid market has done fantastically well too.  That’s probably (we think) in anticipation of new rating rule/methodology changes S&P are set to introduce which no longer will penalise (from a rating perspective) early refinancing of the hybrid obligation. This would be a net credit positive rule change. The iBoxx Hybrid market index spread and yield have both crunched lower by 65bp since September (that’s the same amount seen in the Jan – Aug period) – also to new record lows at B+214bp and 2.02%, respectively.


BoE raises rates

The rate rise came as no surprise

As expected, the BoE reversed the post-Brexit 25bp cut in interest rates with a 25bp hike and the first such move higher in a decade (vote was 7-2 in favour). The need to balance the weak growth outlook with the higher inflation one means, in our view, that the next hike is some way off.

The move was completely expected and well-telegraphed to the markets over the past few weeks. We don’t think this move is a big deal and, if anything, there was bit of a relief rally in UK stocks.

The Governor of the Bank of England suggested moves are expected to be limited and gradual (Brexit uncertainty also thrown into the mix), and certainly the markets think the next move is some way into the distant future. Gilt markets certainly believe that to be the case, reacting by rallying such that the 2-year yield dropped 8bp to 0.40% (below the base rate) and the 10-year yield dropped by the same amount to 1.26%.

We also believe that the sterling-denominated corporate bond market will sustain a better bid and the slow, almost laborious tightening trend that we have seen for most of this year is likely going to continue. The iBoxx sterling corporate cash index is currently at G+130bp ( total returns approaching 4%) which is 22bp tighter this year, so far – although this is the tightest level since the 2007.


Primary re-opens

Daimler: €500m deal

Daimler re-opened the non-financial IG corporate market with a 2-year maturity, €500m floater followed by Swedish Match which took a sub-benchmarked size €200m in an 8-year deal priced at midswaps+65bp.

For the REIT sector, Aroundtown Properties was back with an increased 7-year, €700m deal at midswaps+85bp off a 3x subscribed book which allowed them to improve pricing by 15bp versus the initial guidance.

In financials, the senior market has Sparebank 1 SMN take €300m in a 3-year floater. Finally, high yield opened its account for the month, with Bormioli Pharma printing €280m in a 7NC1 senior secured format priced at Euribor+350bp. B2Holding followed with a €200m deal in a 5-year floater format, priced at Euribor+425bp.

So a rather tentative start with deals to populate the all the different areas of the corporate bond market. Friday should draw a blank, save for perhaps any high yield borrower looking to get priced up.

As for the rest, equities in the Eurozone were down a little, the FTSE was the outperformer (almost 1% higher). In government bond markets, Gilts were the outperformers as mentioned above, Bunds were eventually unchanged (10-year yielding 0.37%) while the equivalent maturity Treasury was yielding 2.35% (-3bp). Trump’s nomination for the Fed chair, Jerome Powell, had little impact in the market as it was widely expected and is not ‘revolutionary” but ‘evolutionary’. Job done.

In the credit market, iTraxx Main closed unchanged at 49.8bp while X-Over was a touch higher at 225.2bp (+1.5bp). As for cash, we closed unchanged in IG with the iBoxx index left at B+95.8bp with the high yield market just a little better bid for choice the index at B+256bp (-1.5bp).

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.