14th June 2017

Playing the game

MARKET CLOSE:
iTraxx Main

56.4bp, -0.7bp

iTraxx X-Over

234.9bp, -1.5bp

10 Yr Bund

0.23%, -4bp

iBoxx Corp IG

B+118bp, -0.5bp

iBoxx Corp HY

B+311bp, -2.5bp

10 Yr US T-Bond

2.14%, -7bp

FTSE 100 (live)

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S&P 500 (live)

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Financial crisis dynamics still propping up risk assets…

Bubble? You bet. We all know that the risk markets find themselves in one. But we don’t see anyone betting against it inflating some more. Much more, quite possibly, as far as some markets might be concerned. The central bank policies which saved the world from going into meltdown back in 2008 are still largely in place and continue to provide a manipulative dynamic propping up asset prices.

They’re still necessary if we are to allow the huge debt servicing of obligations to continue without much altercation. Weaning this patient off the liquidity drug is going to take time, much care, diligence and craft. That is, the blunt tool that comes from policy accommodation which bludgeoned the potential for a systemic financial crisis from emerging feels like it has become part of the system.

There’s now some inflation creeping into the macro outlook, especially in the UK but the BoE has little choice – no choice really – but to hold off and tolerate it. The US has raised again, but will reverse course if need be. It has form, after all. The Eurozone’s core inflation rate remains depressed, QE and low rates here will run well into 2018 and most likely beyond (perhaps in some reduced format for QE). In the meantime, overvalued stocks creep higher – and more overvalued on historical measures which may not be relevant now.

The bid for duration is intact because the Goldilocks economy decrees that we need some safe-haven product on our books – just in case! Credit spreads inch tighter and grind towards record low levels in IG, and deeper into record territory for high yield markets. It’s incredible to see that the HY Markit iBoxx cash index is 100bp – or in layman’s terms, a massive 23% – tighter YTD.

Financial markets carnage isn’t around the corner and that means that we keep tightening in spread terms for the corporate bond market. And while high yield bond yields would make even the most seasoned investor in this asset class wince (the index is at a record low level yield of 2.87%) there is a clear case to expect that the current record low yield and spread levels are set to decline some more. Relative value has long become a concept confined to pre-crisis financial jiggery pokery – and theory – because we’re all still momentum investing. And just playing the game.


Goldilocks turns up in the Eurozone

Ocado raised £250m from the high yield market

The signs that the Eurozone is now working itself through a Goldilocks-like economic dynamic are becoming increasingly apparent. Data on Wednesday showed that employment growth was picking up pace across the region – and that after the unemployment rate already resides at a post-crisis low of around 9.3%. Industrial production slowed a little, however, in April from the previous month year-on-year, but the expansion was running in line with forecasts nevertheless.

German inflation fell in May on a year-on-year basis and eases any pressure on the ECB regarding the stimulus measures where we expect them to remain as accommodative as they are through 2017.

The session overall was a very limited one, which was to be expected given the importance the markets gives to the FOMC even though the rate hike was an odd-on certainty. We had a few deals in primary with Lloyds issuing 7-year notes for €1bn in senior Holdco TLAC eligible funding with Cassa Depositi e Prestiti issuing in the same maturity, also for €1bn.

In non-financials, we had Lagardere in a sub-benchmark €300m 7-year issue deal. And UPCB Finance was the euro-denominated high yield market’s deal, taking €600m in a 12NC5 deal to yield 3.625%. The high yield deal total for the month – at the half way stage – is now up at €3.4bn. The IG non-financial total comes in at €13.3bn.

For those citing political event risks as a potential driver for weaker, or non-functioning markets in the sense that it might provoke some volatility, well someone forgot to mention that to AT&T. The borrower was back for more acquisition funding but this time in sterling as it took a massive £1bn in a 20-year issue (after €7bn in euros last week).

In sterling high yield, Ocado took £250m at a cost of 4% in a 7NC3 structure (notable for eventually pricing some 50bp inside the opening guidance)


Anyone know what’s going on?

Pre-Fed, the markets were grappling with some disappointing US data with consumer prices dropping to 1.9% in May from 2.2% in April, while retail sales fell by 0.3% in May versus expectations of a 0.1% increase. The US yield curve promptly flattened with the 10-year yield dropping to 2.12% (-9bp) and equities stayed mixed (small up/down) on hopes that the Fed might slow (no more hikes in 2017?) the pace of future rate increases. The Fed raised to 1.25% and stuck to plans, in the end, of another hike this year – even in the face of potentially weakening inflation. They also gave details as to the normalisation of its balance sheet. The 10-year Treasury yield rose to 2.14% (-7bp).

In the UK, news that wage growth has fallen significantly below inflation proved a fillip for Gilts with yields on the 10-year also dropping a massive 10bp to 0.94%! And those rate market dynamics were extended elsewhere although the moves were not as pronounced, with the 10-year Bund yield dropping to 0.23% (-4bp) and the OAT to 0.59% (-2bp).

Even oil prices took a tumble, after gasoline inventories unexpectedly rose and crude stocks fell by less than expected. Brent, for example, was off almost 3.5% to around $47 per barrel.

As for credit, the synthetic indices reside at multi-year lows with Main dropping some more on Wednesday to 56.4bp (-0.7bp) and X-Over to 234.9bp (-1.5bp). In the cash market, spreads edged tighter with the Markit iBoxx index left at B+118bp (-0.5bp) and the index yield fell by 3bp to 1.05% as the underlying rallied. The sterling market was a touch better offered amid little activity with the focus squarely on the aforementioned deals. And finally, the high yield market tighter up some more, to B+311bp (a new record low) and the index yield to 2.82% (also a record low).

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.