3rd November 2019

Path clears, seeing out an excellent year

MARKET CLOSE:
iTraxx Main

51.7bp, -1.7bp

iTraxx X-Over

232.4bp, -7.6bp

🇩🇪 10 Yr Bund

-0.38%, +3bp

iBoxx Corp IG

B+113bp, unchanged

iBoxx Corp HY

B+404bp, -3bp

🇺🇸 10 Yr US T-Bond

1.74%, +5bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-2.42%)

US blows hot and cold…

US manufacturing might have contracted for the third successive month in October, but that jobs report is what will focus investors’ minds. The 128k Jobs added in October was well ahead of expectations and markets were boosted by the sharp revision to September’s additions. The Fed probably has a little more to do, though.

Still, the S&P rose to fresh records and, after having had a very good October, the Dax added another 0.75% – itself just around 5% away from its record high. Rates were in reverse, credit primary drew a blank in Europe and cash was unchanged. And the ECB’s QE operation was up and running. It should be a good November.

Into November, and including index changes, the iBoxx cash index closed the opening session at B+113bp and unchanged, reflecting also the lack of activity. We would think that there is another 10bp of tightening in this index into the end of the year, and especially so if equities can maintain the current bullish trend. The ECB’s interest in the market might be a supportive factor as well.

Higher yielding markets didn’t do much in the opening session, the AT1 and high yield markets both closing unchanged, leaving the respective indices at B+460bp and B+404bp (-3bp). The index yield has fallen 277bp this year, to 4.00% – which is still 120bp off the record low. The sterling IG index closed a basis point tighter, reflecting a 10bp in October and 48bp tighter this year so far.

The synthetic indices closed better offered, with iTraxx Main at 50bp (-1.7bp) and X-Over at 232.4bp (-7.6bp).


Superb 10 months of performance

We closed October looking at a quite remarkable performance for the year so far, and one which is far in excess of any reasonably minded expectations. Unusually, both equities and fixed income have done so well, with rates sticking out as a major outlier. It’s all good.

In credit, investment grade spreads (iBoxx index) tightened by 10bp in October and helped offset much of the weakness that we saw in rate markets leaving total returns for the 10 month period at +6.6%, against +6.8% in the period to end September. When put against the almost €30bn of issuance in the month and that IG non-financial supply is heading for a record year, it highlights the level of demand and robustness of the asset class. Spreads are 59bp, as measured by the iBoxx index, in 2019.

Sterling corporates’ performance likewise edged lower to 11.0% in the period to end October, but is just 0.2% off the 11.2% seen in the first nine months. Again, spreads were tighter (-10bp) but the weakness in the Gilt market chipped away at total returns.

Still, the AT1 market has gone from strength to strength. Total returns rose to +13.4% in the January to October period versus +12.4% in the opening three quarters. Index spreads tightened by almost 50bp in October, or 247bp for the year to end October. It looks like there is more to come, incredibly.

In high yield, and despite a weakening economy – especially so the case in the Eurozone, investors can be happy with +8.7% total returns year to end October. That’s just 0.1% lower in October, with index spreads 9bp tighter in the month – and almost 120bp in the period to the end of October.

The sell-off in rate markets dented Eurozone sovereign total returns, and after being up 10.4% in the first nine months of 2019, returns have fallen back to a not too shabby +8.7%. With the ECB’s QE now in operation, we could expect that performance to be anchored at these levels into year-end, with upside quite possibly taking it back close to 10%.

Equities lead, though. The Dax had a very good month. Total returns for the German equity index rose to a massive 21.9% and has bettered even the S&P (+21.1%) for the year to end October. The €Stoxx50 is up almost 21% as well, the Dow 16% and the FTSE lags, rising just 7.7% this year.

Returns to end October, 2019


Bravo, primary

At €278bn year to end October, issuance in the IG non-financial markets is heading for a record total for the full year. And it will come in November. In fact, we predict that the full-year total will easily exceed €300bn and come in closer to €320bn by year-end. The previous record is €285bn, which was issued in 2009 – at the height of the financial crisis as corporates scrambled for liquidity as banking lines dried up.

October’s IG non-financial corporate bond issuance at €26.7bn marks it as the best month since 2014, where €30-40bn+ is achievable in the final couple of months of 2019 – even if the markets generally start to wobble in the face of macro and/or geopolitical event risk.

Reverse Yankee issuance has seen a glut of US borrowers in the market, and they are now responsible for a record 30% of the total deal flow. That’s down 3% from the 33% seen in the period to end September.

After a very good September in the high yield primary market, where we finally saw issuance exceed €10bn after a seventeen month hiatus, October followed up with a sprightly €9bn. We should be due a decent November, too, given the pipeline. For the year to date, we are up at €57.6bn and, as suggested above, we are on course to exceed the second-best annual level of €62bn (2018).

The senior supply metrics, with issuance for the year at €146.1bn, has already seen this year as being the best since 2016 (€145.3bn) and we are on course for somewhere in the region of €160bn when taking into account the usual seasonal slowdown in funding. October’s issuance of €14.3bn was also the best since 2014.

As for this week, we have a Eurozone manufacturing and services PMIs for October as well as retail sales data for September. In the US, the economic data stream slows, so focus will be more on the earnings reports, where the season has generally surprised to the upside.

We’re looking for a good November for credit in the primary market and a continuation of the tightening trend helping to sustain the excellent performance that credit has delivered year to date. There is little reason to change strategy now.

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.