20th January 2017

It’s President Trump, you’d better believe it

MARKET CLOSE:
FTSE 100
7,208, -39
DAX
11,597, -3
S&P 500
2,263, -8
iTraxx Main
69bp, unchanged
iTraxx X-Over Index
286bp, -3bp
10 Yr Bund
0.38%, +3bp
iBoxx Corp IG
B+135bp, -0.75bp 
iBoxx Corp HY Index
B+385bp, -4bp
10 Yr US T-Bond
2.48%, +8bp

Yellen rules, OK…

Fed chairwoman Janet Yellen warned of the risks of moving too slowly

The ECB should have taken centre stage, but didn’t. They left it all ‘as was’ – as was to be expected, but the markets were instead reacting to Yellen’s overnight words regarding “nasty surprises” should the Fed fall behind the curve.

The move in rates in the US saw them move higher across Europe too and it would appear the adjustment higher in yields is doing the job for the ECB. We’re afraid (in a sense) in the fixed income markets because the lower prices in government bonds are having an impact on returns in the corporate bond market. There’s little chance that we close out the with positive returns in IG, although the shorter-duration HY market portfolios will likely eke out positive returns.

Better economic growth is also going to act to support high yield corporates’ credit worthiness more than IG. That should help foster greater confidence in this asset class, especially given that the higher spread of this asset class also acts as a buffer as underlying yields rise.

So, for the moment, we would think that higher beta credit must outperform, be it located in the HY market, or corporates based in the periphery offering higher yields than their investment grade, low beta counterparts.

Indeed this is the case already in these opening weeks of the year with IG currently returning -0.4% and HY returning +0.6%, with spreads a basis point wider in IG (Markit iBoxx) but 20bp tighter in the HY cash index.

Mind, the sell-off in Gilts is hammering sterling returns. Index spreads are 4bp tighter YTD but returns for sterling corporate bond market investors are at -0.8%!


May combative and Draghi dovish

PM May was addressing the political elite in Davos with a combative speech about Britain’s post-Brexit expectations. A global leader in free trade, fair and pragmatic – although not quite ‘Rule Britannia’.

Theresa May’s comments saw sterling up, FTSE down

Sterling, however, strengthened a little on the back of it even if the Davos audience mood was fairly sombre. The 10-year Gilt yield was higher too, at 1.40% (+6bp) and this will have an impact on those sterling corporate bond returns – already under water these opening three weeks of the year.

The ECB (and Draghi, later) were in no mood to rock the boat. There’s a bit of welcome inflation in the system now (albeit energy prices-driven), growth is off the floor, unemployment is heading in the right direction and industry is looking a little perkier. However, there are enough risks given that we have little visibility as to the durability of this current recovery – if that’s what it is.

So, they stayed on hold. The deposit rate at -0.40%, the current €80bn of purchases until March and then €60bn thereafter (whether pro rata or some programmes done away with are yet to be discussed), and a press conference which generally highlighted the downside risks.

The only tweak was that they would (if needed) buy government bonds which yield less than the -0.40% deposit rate.

Steady as she goes, as the Eurozone’s economy shows signs of life, albeit still heavily supported. The euro weakened on the comments while bond yields stayed higher. The 10-year Bund yield was up at 0.38% (+3bp), Italian 10-year debt yields were at 1.99% (+4bp) and Spanish paper visited 1.48% (+5bp).

The Treasury curve was also higher, leaving the 10-year to yield 2.48% (+8bp) and the 2-year 1.24% (+5bp).


Markets tread water into inauguration

The markets did very little in the session but to take a more nervous tone than not. Most bourses were in the red by just a small amount and we can look for much of the same in today’s final session of the week. The inauguration of Donald trump as US President is going to dominate the day.

In the corporate bond market, primary was closed for euro issues – drawing a blank everywhere, while we had a couple of deals in the sterling market from ICAP and Jaguar Land Rover. Slim pickings.

We don’t expect anything material today on the supply front, thus leaving the week to close with €4.8bn of IG non-financial issuance.

Secondary markets were quiet, but with primary issuance absent, there was an opportunity to tighten up the market on the back of better buying interest. The Markit iBoxx IG corporate bond index closed at B+135bp (-0.75bp).

In HY, the market closed better – not undone in any way by weakness in stocks and the index was lower at B+385bp (-4bp). Finally, Main closed unchanged at 69bp and X-Over 3bp lower at 286bp.

Have a good weekend.

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.