18th May 2017

Negative reaction short-lived

MARKET CLOSE:
iTraxx Main

  • 64.6bp, +1.1bp
iTraxx X-Over

  • 259.6bp, +4.2bp
10 Yr Bund

  • 0.35%, -3bp
iBoxx Corp IG

  • B+120bp, +2.5bp
iBoxx Corp HY

  • B+332bp, +10bp
10 Yr US T-Bond

2.22%, unchanged

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Who’s buying this dip?….

The stench of political crisis in the US threatened to shake (hard) the markets out of their perceived complacency, and have the potential to rapidly sully the recent good performance. Uncertainty always shrouds the investment process and investors will take a defensive stance into it. They broadly did on Thursday.

The markets came to a screeching halt, and then backed up some in a fast and furious open on Thursday. Equities lost the recent thrust which had taken them to record highs, the primary credit market pretty much stopped dead in its tracks after over €20bn of IG non-financial issuance in just two weeks, while rate markets picked up the ‘safe-haven’ baton in a classic risk-off session on Thursday.

The dollar looks a little sickly now, sterling has a spring in its step (after higher than expected retail sales), and emerging market risk was battered (FX and equities – and Brazil especially following allegations of yet another government corruption scandal). We saw US Treasury yields drop out of the lower end of their recently-established ranges before a slight rise in them as the session wore on and calm transcended proceedings.

In credit, that meant buying protection – so the synthetic market saw a better bid and CDS levels rose. There was little real selling in cash, as we are now well aware that trying to rebuild positions at potentially ‘wider’ levels would be nigh on impossible, while adding through primary has become a game of pot luck for most and bit of a lottery. There’s no buying the dip in the cash market either, given the precarious state of secondary market liquidity, while primary drew a blank in IG although we had a couple of non-financial high yield deals.

So, in line with weakness in non safe-haven markets, cash credit was marked wider with the Street taking its customary defensive stance into the broader market weakness elsewhere. The only significant way to buy the dip is to add through primary, but unfortunately that market is closed.

What looked like being a good month for equities and less so for fixed income duration markets has potentially been turned on its head. Of course there’s plenty of time for that to change, but the severe weakness in equities has played into the hands of fixed income markets. Credit investors won’t be too alarmed at present, with any moderate spread weakness of late offset easily by far by the rally in the underlying. And high yield markets look rock-solid here in total return terms, given the lack of volatility for this lower duration product.


It’s been a good week for primary

Thursday’s primary market activity resulted in a real damp squib of one amid the Trump furore. However, we could afford a quieter session without too much concern that issuance levels might be too low, given that we have a had a decent couple of weeks of corporate supply.

E.ON, LVMH, IBM and Apple amongst several others have issued between them €12.75bn of IG non-financial debt this week – into the close of business on Wednesday, before the markets came to an abrupt halt. For the month so far, we’re up at €25.95bn.  Should we recover post-haste, from a broader market sentiment perspective anyway, we’re going to be looking at €30bn+ of issuance before we close out May. That’s a good recovery following the dire €5.6bn effort in April.

Kemira Oyj: High yield deal on Thursday

As for high yield, in Thursday’s session we had a couple of prints from the unrated Kemira Oyj and Iron Mountain for a total of €500m. Back in the day, that Kemira pricing of midswaps+140bp for a 7-year would have been a safe triple-B-like level; Now it maps into a high single-B like pricing metric.

Anyway, the deals take the monthly total to a respectable €1.9bn, although we expect that to rise further over the next few sessions given the number of borrowers looking to get deals away. More modest levels of geopolitically-induced market volatility ought not to preclude issuance in this more macro-volatility resilient market. The unrated Banca Ifis concluded the day’s issuance with a 3-year €300m deal.


Work that out!

The US markets came out fighting against Wednesday’s losses and managed to eventually bring some calm to proceedings. With the US opening in such fashion, it helped the European markets to come off their earlier lows amid a relative sense of calm, which also saw the VIX index close below 15%.

It was as if it was a case of “so what?” to the Trump developments and “let them play out”. That stays true to the recent market form of effectively brushing aside any barriers to a risk-on trajectory. So, US stock markets were in the black and European bourses managed to come off their session lows.

Government bonds got a good bid behind them early on, only for the market to fade the rally. 10-year Gilt yields played out in a 1.03-1.07% range before closing unchanged to yield 1.07%. The equivalent Bund played out in a 0.31-0.38% range before closing to yield 0.35% (-3bp), while US Treasuries were unchanged at 2.22% having yielded as low as 2.18% earlier in the day. All the excitement happened in the morning session.

In credit, we again widened amid limited flow into it and leaving the Markit iBoxx IG cash index at B+120bp (+2.5bp). Unfortunately, the Street was unforgiving as the high yield market took a major revaluation and the index moved a massive 10bp wider to B+332bp. Again, that came amid fairly limited flows and we would expect it to reverse in due course.

Finally, the iTraxx index moves reflected the earlier market concerns but managed to recover from the highs as equities and sentiment also improved. It left Main to close out at 64.6bp (+1.1bp) and X-Over at 259.6bp (+4.2bp).

Have a good day. Back on Monday.


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.