14th January 2018

Pedal to the metal

MARKET CLOSE:
iTraxx Main

44.3bp, unchanged

iTraxx X-Over

229bp, unchanged

10 Yr Bund

0.51%, -2bp

iBoxx Corp IG

B+90.7bp, +0.2bp

iBoxx Corp HY

B+274.4bp, -1.4bp

10 Yr US T-Bond

2.55%, +2bp

FTSE 100 , DAX , S&P 500 ,

Sweet spots and all that…

For some, the global economy is doing annoyingly well. The warnings of markets overheating are being sounded loud and clear, but we’re mostly ignoring them. Fund inflows (equities and fixed income) are at elevated levels as investors chase markets higher, full of confidence that the economic recovery is now well-entrenched and markets will be supported as a result of it.

There’s a feeling of euphoria in the market resulting in a solid bid for risk assets. Clearly, longs are nowhere near maxed out. So markets have room to rally further and we’re all set up for a good first quarter, at least. Those tax reforms in the US are still to be fully felt as well.

Adding to it, the news flow at the end of last week was upbeat. We probably have a coalition government being formed in Germany (euro rallied), inflation was lower than expected in November/December in France and Spain (duration got bit of a bid), while Melrose’s offer for GKN gave M&A markets a boost. There were even reports that some EU countries were pursuing a soft Brexit (sterling rallied)! It doesn’t get much better.

We’ve had a very positive, upbeat opening fortnight of 2018. Equities, as always, have led the way (the earnings season is also helping now) but oil is higher (Iran tensions providing a boost), credit spreads are tighter and mostly in record territory, the euro is strengthening against the dollar while we have the classic recovery-led sell-off in rate markets.

The latter was in evidence again on Friday, with US Treasuries under fire following a 0.3% rise in core-CPI in December, the highest for almost a year. The 10-year yield rose 2bp to 2.56% but the story was the 2-year, as it topped 2% (2.02% intraday high) – and the highest level in a decade (since the crisis began).

There has been a big focus, though, on the corporate bond market, not least because total return investments are likely going to feel some heat as rate markets come under pressure. Benchmarked investors will have far fewer concerns in 2018.

Spreads have tightened with some gusto in the more fancied sectors like IG and higher beta financials (CoCos), issuance has been very good (almost €15bn from senior financials already, for example), there has been little event risk and demand for corporate bonds has been resolute – as it usually is at the start of most years.

That sweet spot for the market, borne from macro, the news flow, the modest rises in rates, the US tax boost and so on is serving up a final, most likely (albeit extended) last hurrah for asset markets.


Corporate credit roaring ahead, too

While the rise in European stock markets is a little more laborious compared to the US markets (currency factors weigh), the resilience of and bid for European credit is anything but. We closed last week with the Market iBoxx index residing at a record tight level of 90.7bp, which gives us a tightening of 6bp for the opening two weeks.

We have to be thinking that each move now is going to be grind given these levels, with supply levels expected to pick up and be the focus for investors. Nevertheless, so long as sentiment towards global macro remains positive, then we are going to have a continued tightening trend for spread markets. Rising rates, though, are going to act out to limit the returns upside, with the index yield up at 1.09%, which is the highest level since October.

Issuance has been decent, we would say, with IG non-financial corporates printing €13.2bn so far in 2018. Over €30bn for the month would be a good figure although after a relatively light December (less than €7bn), we would have anticipated a stronger opening fortnight. There has been nothing in high yield, save for the sterling Zoopla deal.

The sterling market is also similarly exhibiting a positive bias, with the cash iBoxx index at G+124.3bp – the tightest levels since the financial crisis began a decade ago. Brexit, Trump’s visits, rising Gilt yields (10-year at 1.33%, +2bp Friday) and a disjointed economy not firing on all cylinders like the Eurozone’s are failing to deter investors while issuance in the IG non-financial sector is nil so far this year, although we have had a few sterling financial deals.

The contingent convertible market continues to outperform, as the banking sector’s credit fundamentals continue to improve. The index dropped another 4bp at the end of last week, to reside at a fresh record tight of B+329bp. It is 34bp tighter already in the opening 2 weeks of the year. It’s early days of course, but returns are up at 1.3% already. In high yield, there hasn’t been much happening for a few weeks, but spreads were dragged 1.4bp tighter, leaving the iBoxx index at B+274.4bp at the close.


Of course, more records in US

We had a very strong close in the US on Friday where all three major indices set fresh records. The S&P and Nasdaq both closed 0.7% higher and the Dow 0.9% as the earnings season delivered as usual (JP Morgan and Wells Fargo beating expectations), while the dollar’s continued weakness was also a contributory factor. It augers well for the markets in Europe at Monday’s open as they try to play catch up having risen by up to 0.5% in a more lacklustre session on Friday. We won’t get much of a push otherwise from the US as the market is closed for Martin Luther King Day.

The earnings season starts to ramp up too, with American Express, B of A, Goldmans, Citigroup, Morgan Stanley and Schlumberger all due to report. Away from that, it’s fairly light on the economic calendar although we do have CPI reports from both the UK and Eurozone (with both expected to slip for December).

Overall, we expect that the upbeat tone will prevail, we’re likely going to see more record highs in the US, and spreads will continue to edge better for choice. High beta risk in that sense is going to outperform and let’s look forward to the first euro-denominated high corporate print.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ 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 CreditMarketDaily.com.