6th September 2017

The markets are telling us

MARKET CLOSE:
iTraxx Main

54.0bp, -0.5bp

iTraxx X-Over

235.2bp, -2.2bp

10 Yr Bund

0.35%, unchanged

iBoxx Corp IG

B+111.6bp, +1.5bp

iBoxx Corp HY

B+300bp, unchanged

10 Yr US T-Bond

2.11%, +4bp

FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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…that it is not all that bad…

It might look like a mess, and feel like a whole of fears are suddenly impacting asset valuations, but there is something orderly and understandable about it all. First, and something we have been going on about for a while, there is liquidity effectively underpinning a whole host of markets and keeping asset valuations at inflated levels.

Bubbles are being created as we know them on a historical comparison. But the low policy rate regime has left a low market rate environment and the crowd has flocked to assets that give them more. The corporate bond market, in the fixed income space, has been an obvious chief beneficiary of that. For borrowers that means enjoying an extended period of record low borrowing costs, for investor performance it is in terms of total returns, while benchmarked players haven’t fared too badly either. And, with all that perhaps a temporary structural change in the market as funding mechanics disintermediate.

So, we are all pretty much coming around to the idea that central banks are continuing to find it difficult to raise rates as inflation remains stubbornly low. Nor will the central banks want to kill off any emerging signs of growth. They won’t want to move too soon. The excess liquidity generated within the system props up the equity market which might be trading on stretched forward P/Es, but where the earnings story holds up enough to justify the level of the market.

Right now, it seems like equities want to go higher but are held back by the geopolitical event risks which, if resolved soon, will no doubt see many bourses hit record highs again.

As for government bonds, as we mentioned in Wednesday’s comment, many forecasts for a 3%-like handle on 10-year US Treasury yields and 1%+ for the equivalent Bund yield are as far away as they have ever been. Much of that is event risk-driven, but while the Eurozone economic recovery looks to be gaining some momentum (absent any rise in core inflation), the US one is more choppy (also absent any noticeable rise in core inflation).

Recent comments from a US Fed Governor suggest that a rate hike isn’t happening this month, while the ECB is on the wires on Thursday with their latest thoughts on the rate outlook (we look for no change and no word on asset tapering).

Logic has probably long dictated that rates should be going higher, but they aren’t. We need to get over it. It might be that we don’t even see 0.50%, for example, on the 10-year Bund yield at year-end. There is too much liquidity & it can’t all stay in cash and looks therefore for the ‘least worst’ asset.

So it is not all confusion, but admittedly, it sometimes feels like the crowd swings too far one way then t’other. We think markets are suitably poised to hold around these levels for the moment and have the potential to move better – only held back at the moment by the potential for something ugly to emerge out of the east Asia situation.

For credit, investors will continue to add through primary as always and secondary will stay light with spreads tightening in limited fashion until we see that light at the end of the tunnel. Our hopes for a ratchet tighter in September – in part recovering some of August’s weakness- might be a little optimistic, but we’re still anticipating a much better bias for a tightening trend over the coming weeks.


Primary continues to deliver

The new deals continued to flow in the session, and we would say that the day was as accommodating as Tuesday’s for the corporate sector. That is, we had high yield markets in good form. After all, we had just two deals for €625m in August, the last of them two weeks ago. So today’s four offerings were much welcomed. There is much more to come.

€1bn deal: Equinix

For investment grade non-financials, in euros, we had Iberdrola take €750m in a 10-year Green bond deal costing midswaps+58bp which was 17bp inside the opening guidance level. Australia’s Transurban group was in for €500m in a 2028 maturity deal at midswaps+95bp (-10bp versus IPT). Unrated French group Ingenico took €600m in a 7-year offering some 20bp inside the initial price talk at midswaps+130bp.

That total for the session of €1.85bn compares with €4.75bn in the previous session, but takes the total for the week/month to €7.2bn and a trajectory that might get us to €30bn for the full month.

The high yield market finally had deals – and plenty of them. The opening print of the month came in the form of a €100m tap of the 6.875% 2024 issue from Nyrstar Netherlands. We followed with Garfunkelux Holdco with a €415m in a 6NC1 senior offering before a whopping €1bn from Equinix in an 8NC3 senior unsecured note to yield 2.875%.

Finally, Kronos priced a €400m 8NC3 deal yielding 3.75%. That’s a good, near €2bn in the session to start the month with!

Financials were represented by Yorkshire Building Society with a £300m 11NC10 Tier 2 offering priced at G+235bp.


Treading water elsewhere

In the session, equities were up a little although the DAX had a better session of it, up 0.75%. In the bond market, Gilt yields in the 10-year sector were back at 1.00% (-1bp), Bunds were unchanged to yield 0.35% in the same maturity, as were US Treasuries at 2.07% – for most of the session, before news of a debt ceiling extension for 3-months helped equities higher and Treasury yields rise to 2.11%.

Synthetic credit had iTraxx Main at 54.0bp (-0.5bp) and X-Over at 235.4bp as the indices continued to clawback much of August’s weakness.

As for cash, secondary was light as usual. The ECB is up on Thursday and we dare think many will be waiting for news on the corporate sector QE bond purchase programme. In the meantime, and into perhaps some nervousness on that (?), we traded a little wider and that left the Markit iBoxx IG corporate bond index at B+111.6bp (+1.5bp).

The high yield market close unchanged with the iBoxx index at B+300bp.

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.