9th May 2017

Sell now & buy back later?

FTSE 100
7,301, +3
12,695, -22
S&P 500
2,398, -1
iTraxx Main
63bp, -0.5bp
iTraxx X-Over Index
255.7bp, -0.7bp
10 Yr Bund
0.42%, unchanged
iBoxx Corp IG
B+116.2bp, -1.15bp 
iBoxx Corp HY Index
B+328bp, -2bp
10 Yr US T-Bond
2.38%, +3bp

Oh well, it was all priced in

The markets anticipated Macron’s victory, it seems

No mega rally, but few would reasonably have expected that. Unfortunately though, we didn’t get any sort of rally and some will find that disappointing. There’s no need to be, and in hindsight, we would think that the French election result was priced in to the market already.

As if to make an excuse for the uneventful session, the markets are looking to the potential for Macron becoming a lame-duck President (Hollande-esque) as a means of explaining away the day’s poorer than expected showing. So once the post-election market shuffling is over – which will be quick – we can get on with seeing out the second half of the quarter, and hopefully in a positive light.

The UK election comes up next but will not surprise the markets in our view and thereafter we have the French parliamentary elections. If Macron subsequently finds that his support base isn’t ‘supportive’ for his policies (after all, he has no seats in parliament), then we have more of the same from France.

In the meantime, we don’t think there will be much of a reason for us to sell-off. ‘Us’ refers to the corporate bond market. Credit spreads have had a superb run of late and while we don’t think the same pace of tightening is likely without a catalyst to provoke it, we do expect a steady grind. There is little by way of headwind going forward, so no one should sell and take profits.

The salutary lesson of the past several years is that selling to buy back later – even of spreads widen – can be costly and very difficult. Poor secondary market liquidity and a mad scramble by the whole market to get hold of bonds in primary leaves much to chance. It’s just too difficult to sell with a view to buying back later. Don’t do it.

The super run of late saw the Markit iBoxx index tighten by 14bp to B+117bp (record low level is B+94bp) in the last two weeks, having barely moved since the beginning of the year before that (just 3bp tighter to mid-April). And that also comes after the reduced purchases of bonds as a result of the ECB’s QE effort (see below). So the relief in all markets was all felt following the first round of the French election. The current level of the investment grade market surpasses our year-end target (!), and we are now thinking in the context of a B+105bp level for this index into the end of 2017.

In the same period, the high yield market tightened by 40bp (iBoxx index), but already some 40bp tighter in the period from January to mid-April. This market has had a very good year so far with some support which has been firm and any sell-off confined to Street weakness (not bidding) when equities have moved sharply lower in odd sessions. Somewhere of the order of B+300bp for this index (which would be a 10-year tight) might be a reasonable level to target – even with the current high run rate of new deals.

In tune with an underwhelming session, we had not a single deal again in the market for corporate bonds – in fact, there wasn’t a single euro-denominated deal anywhere. So after just €5.6bn of non-financial corporate issuance in April, we have followed it up by a paltry €1.8bn so far this month. It is obvious that low level of issuance has been a contributing factor to keeping the secondary market better bid, but of course the generally better risk-on tone has also helped – as did that initial post-election surge. There is a decent pipeline of deals in both HY and IG but we’re beginning to wonder whether we should remain as upbeat as we have been that the market can deliver somewhere of the order of €20bn+ of supply this month in IG non-financials.

ECB weekly corporate bond purchases fall – again

The latest ECB investment grade, non-financial corporate bond purchases came in at another week-on-week reduced level, at €1,152m. That is now the fourth week in a row that they have declined, having been at €1,218m two weeks ago. We now have our trend established such that the ECB is tapering its corporate bond purchases. That comes after €1,692m was accumulated four weeks ago (see chart).

The much lower than long-term average of weekly accumulations (€1,738m per week over the life of the programme) does now seem to represent a lower level of purchases from the bank given the reduction in overall bond purchases from €80bn to €60bn per month. The current lift is 30% down on the long-term average while the overall programme has bond purchases lower by 25%. If liquidity was a reason for the larger decline versus that of the overall programme (25%), then we would likely see a more material impact on secondary market valuations because €1bn+ a month of IG non-financial debt ought to be making a more material impact on valuations.

ECB weekly purchases register more falls

The total purchases to date, after 48 weeks, stand at €83,414m.

We bought the rumour

Very little happened in the markets on a day where there was also very little fresh macro news flow. Equities played out in a narrow range and were up or down by a very small amount; Basically directionless. Having said that, the CAC index was the worst performer and was down by almost 1%, perhaps on reflecting the scale of the (impossible) task facing Macron – and/or some profit taking following the 5% surge a couple of weeks ago. Government bonds did very little, too, and effectively closed unchanged – with no compression in the Bund-OAT spread (at 36bp). The only weakness we saw was in Gilts, where the 10-year yield is now up at 1.14% (+2bp).

In credit, as already mentioned, primary drew a blank across the whole market. In secondary, investors remained sidelined and that was no surprise given the lack of action elsewhere. Still, spreads were marked more than a touch tighter for choice. As measured by the iBoxx index, IG spreads were at B+116.2bp and 1.5bp tighter on the day. The high yield market edged better too, 2bp tighter in the session.

For iTraxx, protection costs declined only marginally having rallied (dropping) more earlier in the session. Main finally closed at 63bp (-0.5bp) and X-Over at 255.5bp (-0.7bp).

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.