17th March 2017

Not Wild about Geert

FTSE 100
7,416, +47
12,083, +73
S&P 500
2,381, -4
iTraxx Main
70.5bp, -1.75bp
iTraxx X-Over Index
278bp, -6bp
10 Yr Bund
0.45%, +4bp
iBoxx Corp IG
B+130.8bp, -1.25bp 
iBoxx Corp HY Index
B+367.4bp, -9bp
10 Yr US T-Bond
2.54%, +3bp

Two big events to go

Defeated: VVD leader Geert Wilders

The Dutch election result doesn’t pass without consequence – and Geert Wilders or the PVV aren’t going away. Still, it was a potential major blooper for the markets which has now passed in terms of how we might have seen it to be in its worst form. The Fed hike could have carried the same downside risk to asset prices, but has seemingly passed with only two more rate hikes anticipated this year.

Looking beyond the daily to’ing and fro’ing of market moves, we’re set for a clear run into the end of April’s first-round French elections in terms of definable clear event-risk situations. The markets will be anticipating a non-Le Pen victory, macro looks a little more certain to the upside as the days go by and few will be booking any profits when they can see that clear rise in asset prices to come.

So there is little reason why the markets can’t continue their established trend this year of moving higher with a risk-on like bias. Uncertainty takes a back seat now. The dovish Fed keeps it all intact. Higher equities, tighter corporate bond spreads, a better feel around EM (equity, FX and macro) while government bonds might edge lower (in price) in that period, occasionally supported by the ebb and flow of the emerging data streams.

A bullish feel to the markets should persist through the end of the first quarter and into the next. We will not go up in a straight line, but the path of least resistance is clear. We’re already up at record highs for UK stock markets – again. Credit spreads will tighten in our view, but returns are going to be a stickler as they are eroded by the weakness that we will get in the underlying.

Hopefully, that weakness over the next few months will be curtailed by the more dovish policy from the Fed. Strangely, any euphoria didn’t find its way into the primary market yesterday, where we were left without a single euro-denominated corporate deal!

Blankety blank in primary

They were shy in coming forward yesterday. There were no deals of any note in the corporate space – it doesn’t really matter. We’re at the halfway stage for the month and we have had €15.35bn of IG non-financial issuance which leaves us heading for €25-30bn before the month is out. That’s totally possible. The high yield market has delivered an excellent €5.6bn and somewhere in the region of €7-8bn would be a reasonable expectation as we close out March. Paprec finally priced its €225m tap yesterday.

The market has not really seen a consistent stream of deals for a prolonged period, issuance coming in clumps although the market is very receptive to most borrowers. The demand for corporate risk is as good as it has ever been, few are being deterred by the ratchet tighter in pricing, and those who are find themselves left behind given the volume of demand.

Also, deals in the most part have been performing on the break. All-in funding costs have risen but remain within touching distance of those all-time record low levels. While rates are heading higher – slowly – few will rush to get anything away, knowing that markets will remain kind through this year, at least.

It’s no problem to have a session or two of zero supply.

First day of the rest of the month

BoE: Slowing corporate bond purchases

The aftermath of the Dutch election and the FOMC meeting/rate hike saw a broad rally across equity markets in Europe (small red however in the US) and a small sell-off in government bonds. Ten year maturity Bund yields were up at 0.46% (+5bp) as were OATs to 1.10% while Gilt yields rose 5bp to 1.26% in the 10-year maturity.

In secondary credit, the BoE announced a continued slowing of its weekly purchases. After almost 6 months into an 18 month programme to acquire up to £10bn, they had acquired £8.22bn of IG rated non-financial debt. The sterling market closed completely unchanged!

For the euro-denominated debt markets – euphoria! Well, it wasn’t a busy session, but the market was tightened up such that spreads are now at their lowest levels seen this year – the Markit iBoxx index at 130.8bp (-1.25bp). And that comes following a couple of days of moderate weakness in spreads amid jitters around the Fed and Dutch elections.

The high yield secondary market was rocking. Well, we tightened by 9bp on a cash index level (to B+367bp, iBoxx) amid light volumes but the intent was clear. Risk on, scarcity of paper, yield hogs still in the hunt and we are going tighter. Another 7bp of index tightening are still needed before we see the lows of this year.

Finally, the indices saw iTraxx Main heading back to a sub-70bp level, closing at 70.5bp (-1.75bp) with X-Over also significantly lower at 278bp (-6bp). Should the risk-on tone prevail as expected, Main could be down at 65bp and X-Over closer to 250bp over the next several weeks.

Overall, we believe the credit market is in good shape from both a fundamental perspective and a technical one. Credit metrics can only improve into better macro dynamics while the oodles of sidelined cash balances are not being satiated by the level of issuance that we are currently getting.

Fresh fund inflows, bond redemptions and coupon income remain at high levels. Spreads should go tighter, serious event-risk permitting.

Have a good day and weekend.

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.