- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Heads you lose, tails you lose…
After the calm, no storm, but just a little hesitancy detected in the markets in a session where we moved weaker, for choice. The government bond markets were again grappling with directionality, investors wondering whether to book whatever they can and close out for the year, or look at the pull-back as an opportunity to take on a little more risk.
After all, 10-year Italian government bond yields are over 100bp higher ( they’ve doubled) versus the August lows, the equivalent maturity Bund yield has jumped 50bp in the same period while the 10-year Gilt has seen its yield also more than double to 1.40% from its post-QE announcement lows. The ECB and the BoE are still in QE mode, but since when has the (potential) scarcity of bonds overridden market forces? The market is running scared and is effectively demanding higher premiums to finance the Eurozone (and US) deficits and potential spending plans.
After all, if growth is going to be picking up materially, there is now a competing asset for government bonds. We’re no longer battening down the hatches, so to speak. To make it attractive, governments will have to pay up. Inflation expectations are rising, too, further erasing returns in real terms. Still, the flip-side has it that we could be getting ahead of ourselves. That recent economic data from the US (retail sales on Tuesday) are so upbeat, there could be a delay or some moderation to the unleashing of the Trump-induced infrastructure spending programme. We don’t think that will be the case given that the President-elect is looking to double growth (over the medium-term), so he has to spend in order to fulfil the easiest of his pre-election promises.
Whatever, we are at about the most uncertain period for market direction than at any stage this year. Given that, it does seem like we are going to trade with a little volatility for the next few months and play out to the headlines around US policy more than anything else. The ECB will likely have to readjust with those headlines, too, given that they will be as in the dark around the medium-term economic outlook that comes from that evolving US policy.
Primary keeps credit investors occupied
Corporate bond investors were kept busy with the primary market although the deals were still a little light in their number. APRR lifted a €1bn in a dual tranche deal in 10-year and 14-year funding and managed to clip 10-15bp off the initial price talk while Eastman Chemical kept up the issuance flow for US corporates with a tap of its 23s and a new 10-year for a combined €700m. That €1.7bn was it for IG non-financials, taking the weekly total to €8.6bn and all of it bar the Mercedes-Japan and APRR deals coming from US entities (Mylan and AbbVie being the others lifting €3bn and €3.6bn, respectively).
Is there a story there? We don’t think so, it’s just that US borrowers have M&A financing to do and a there is a bit of opportunistic funding in there given the lower rate regime here versus the US. European borrowers have been sidelined of late, but there was a flourish when we kicked off the month as Abertis, BASF, G4S, Statoil and RCI (to name but a few) printed deals.
Financials saw Reit Akelius Residential Property transact for €600m, while ING issued a dollar-denominated AT1 CoCo (brave – but they got it done and easily inside the initial price talk, by some margin).
Shaking it all about
Newsflow was light yesterday; Instead we were left with opinion on various issues around the likelihood of deficit targets being breached, inflation expectations (higher of course, d’oh!) and that a relative rookie Emmanuel Macron would contest the French Presidential elections. With all that, stocks closed out across Europe down by between 0.6-0.75% lower having opened positively. Oil had a mini-volatile session as US crude inventories rose more than expected was the bad news followed by the good news of a potential OPEC oil freeze in production. Brent was touch lower at $46.6 per barrel.
Government bonds – from a yield perspective – were mixed into the close. Bund yields fell a touch, having been higher for most of it with the 10-year left at 0.29% (-1bp), the same maturity Gilt was at 1.38% (unchanged) while BTPs popped back up through 2% to 2.03% (+7bp) and Bonos to 1.54% (+8.5bp). Portuguese debt saw yields rise by 17bp to 3.65% as the euphoria around saving its DBRS investment grade rating and the passing of the budget fades.
As for the corporate bond market, weakness. The IG Markit iBoxx index illustrated it perfectly as it rose to B+132.2bp and 2.5bp wider in the session. That level is the highest since July and off the B+120bp low seen this year – still 22bp tighter YTD. That’s not good news because we have the ECB sucking up some €1.8bn of corporate bond debt per week and it should be enough to quell the weakness in spreads. The high yield market outperformed as it closed very slightly weaker at B+435bp on an iBoxx index basis (+1bp). Even sterling markets outperformed euro-denominated debt markets, the index just 0.25bp wider.
The indices closed higher, and in proportion with the weakness seen in cash. Main was up at 79bp (+1.75bp) and X-Over at 344bp (+4bp).
We actually still like credit.
Back tomorrow. Have a good day.