17th November 2019

Credit ticks all the boxes

iTraxx Main

48.9bp, -1bp

iTraxx X-Over

235.2bp, -6.2bp

🇩🇪 10 Yr Bund

-0.34%, unchanged

iBoxx Corp IG

B+113.5bp, +1bp

iBoxx Corp HY

B+399bp, +1.5bp

🇺🇸 10 Yr US T-Bond

183.5%, +1.5bp

🇬🇧 FTSE 100

7403.92, (-0.44%)
🇩🇪 DAX

13579.33, (-0.62%)
🇺🇸 S&P 500

3337.75, (-1.05%)

Half time report…

We’re at the halfway stage of the month, and it’s fair to say that credit markets have held up fairly well despite the (largely) trade-related unease which, at times, has been affecting equities. Despite general weakness in credit markets in the past week, IG spreads are unchanged this month, while the high yield market is tighter (iBoxx index, -8bp).

We have seen some widening in spreads in the CoCo market (index +11bp) but having tightened by almost 250bp already this year, we can forgive some moderate levels of weakness, especially where year to date total returns exceed 14%. We think all that represents a clean bill of health for the corporate bond market. Lest we forget, IG non-financial issuance has topped €16bn and we have absorbed almost €11bn of HY rated debt already this month.

Not that equity markets are necessarily having a particularly difficult time of it. Far from it. In the US, we closed with all three indices yet again residing in fresh record territory. We would think that the bounce in retail sales in October, up 0.3% and beating the 0.2% expectations, were helpful although the purchase of big ticket household items saw a retrenchment suggesting that the holiday season shopping period could be a difficult one. However, the latest on the trade front (Kudlow’s comments on a pact “coming down to short strokes”) will also have heartened investors more.

There’s some that can go wrong still. We might not get a trade deal at all this side of 2020. The market does expect something to be agreed/signed over the next week or so. The escalation in the violence in Hong Kong doesn’t seem to have been factored into markets as one might have anticipated, with the US so far largely staying out of the fray. Admittedly, Brexit is no longer an immediate risk while the recent macro data has allayed fears that growth is sliding lower uncontrollably, with some even suggesting we’re seeing the green shoots of recovery (we are not!).

Overall, we retain our optimism that markets can continue to firm up through to the end of the year. We’re not about to let the year’s excellent performance slip away at the final hurdle with just 4 weeks of likely business left in 2019.

Close to wrapping up a fine year in primary

There is a decent pipeline suggesting that we are going to have busy week and half into the Thanksgiving break, but that the first couple of weeks in December could also see us with €10bn or so of IG non-financial issuance. For November so so far, the €16bn issued suggests we are on course for around €30bn+ before the month’s end.

Last week wasn’t the busiest, with just €5.6bn issued although there was once again a US domiciled borrower flavour to the deal flow (Harley, Abbott, Moody’s Corp).

The high yield market, though, added €4bn though in a sprightly week, and issuance for the month is up at €10.7bn marking it as the best November since 2014. Another near €7bn is needed for the 2017 record (€75bn) but we think that is unlikely – although we could get very close.

Promises, promises, promises

US equities would have taken all of the headlines for Friday’s session, closing out a third successive session at record levels after they added another 0.8% or so. European markets were also pulled higher with the Dax up 0.5%.

Labour: Interesting promises

The FTSE managed gains of just 0.1% after the Labour Party put the frighteners on investors following a potential manifesto pledge to renationalise part of BT (and other providers) in order to bring the country’s broadband offering under public ownership.

We would think that that the more ‘outrageous’ or quirkier the Labour Party’s spending commitments, the more likely it is we see a Conservative government with that view reflected in currency markets. Sterling has been perkier this past week.

Credit protection costs moved lower in line with the rally in equities, leaving iTraxx Main at 48.9bp (-1bp) and X-Over at 235.2bp (-6.2bp).

Cash, though, underperformed and edged wider for choice. The iBoxx IG index closed at B+113.5bp (+1bp) which represented a 4bp widening for the week – and seemingly unsupported in these early days of the resumption in the ECB’s QE related corporate bond purchases. The high yield market was barely changed with the index at B+399bp (+1.5bp) and the AT1 market was unchanged.

There’s not too much happening in secondary and a sense, as we close out the year, that dull as dishwater is good with small moves tighter or wider likely the dynamic from now. As for this week, primary will be the main focus again in credit and plenty on the data front to think about including US durable goods and Chinese manufacturing PMIs.

Have a good day.

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.