18th September 2017

Remarkable – or is it?

iTraxx Main

50.22bp, -0.3bp

iTraxx X-Over

222.1bp, -3.3bp

10 Yr Bund

0.46%, +2bp

iBoxx Corp IG

B+107.8bp, -0.75bp

iBoxx Corp HY

B+286bp, -2bp

10 Yr US T-Bond

2.23%, +3bp

FTSE 100

7,254, +39


12,559, +41

S&P 500

2,504, +4

Outlook remains bright

What’s remarkable about the corporate bond market in Europe is how unremarkable it has been over the past quarter. The numbers don’t lie. The Markit iBoxx cash index has IG spreads 7bp tighter in the last three months, against 26bp in the year to date. Spreads in the CoCo market are unchanged in the same three month period but 110bp better YTD, while sterling corporate risk is likewise unchanged in the past quarter and just 17bp better YTD.

The winner in spread terms has been the HY cash market, 18bp tighter in the period since June and 124bp tighter in 2017. The spread performance, that is, has come in the first half of 2017 for all sectors of the market, while total returns have been boosted since June as the underlying generally had been rallying. Contingent convertibles have returned 12% YTD.

The story behind the corporate bond market has been positive all year. The ECB has now lifted over €111bn of IG non-financial corporate debt, the economic picture is completely supportive as we play out to a Goldilocks-like growth dynamic, rate market uncertainty hasn’t dampened investor enthusiasm for corporate bond risk and (as in the case with most other risk asset classes) geopolitics have barely impacted valuations. When we look at what the iTraxx indices are telling us, the outlook is fairly constructive as they reside at multi-year lows at around 50bp and 225bp for Main and X-Over, respectively.

The cash market is much more technical versus the synthetic one, and the poor liquidity and secondary activity has resulted in an investment process which sees most prefer to add through the new issue market. That therefore isn’t promoting tighter secondary spreads to any meaningful degree as we might otherwise have expected.

A couple of deals to focus on

Taking its toll: €700m in 12-year funding came from Italian toll firm Autostrade

Not bad for a Monday in primary as it delivered a couple of IG non-financial deals for €1.3bn to start the week off. Canadian based automotive parts supplier Magna International reduced the initial price guidance by 15bp for a €600m, 10-year deal priced at midswaps+60bp. This was followed by €700m in 12-year funding by Autostrade at midswaps+80bp, which was 20bp tighter than the opening guidance.

The tally for the month for IG non-financials moves slowly, now at €16.9bn and towards that €30bn+ target we expect for the full month. There was nothing in financials or high yield in the session.

In sterling, Pennon Group was busy in order to have funds in place to call a £300m 6.75% hybrid deal due next year (before the coupon jumps to over 10%!). So in a similar structured deal, they issued £300m in a PNC2.7 hybrid priced to yield just 2.875%. That’s a considerable saving in interest costs, and it would be almost rude not to have got the deal done!

While the ECB fills its boots

As for the ECB, the haul of non-financial corporate debt last week came in at a much increased €2,116m versus €1,766m in the prior week. That is a mighty effort for last week and is the best weekly accumulation for 10 weeks (see chart). With that in mind, and the comments above, we must be looking at a decent run here for secondary market valuations.

ECB Weekly Purchases

The total purchases to date, after 67 weeks of market participation, stand at €111,189m with the long-term weekly average purchases at €1,660m.

More records for US stocks

Elsewhere, the ECB’s regular economic bulletin was released with a forecast that headline inflation would fall back to 0.9% in Q1 2018 after recording a rate of 1.5% currently. Gloomy analysis or not, equities were having none of it. And in Monday’s session, it was moderately risk-on for European equities, rising by up to 0.5% across the board. Perhaps we have finally caught on that the US equity markets are only going higher and we ought to as well! In the US, it was a case more record for the S&P and Dow while the Volatility Index was back down again at around 10%.

In the rate markets, the session saw ‘core’ debt edge weaker (in price), but after Portugal’s rating upgrade at the end of last week – back to investment grade, we saw a good rally in its debt and a firmer tone for peripheral debt. The 10-year Portuguese government bond dropped 10% or 30bp to 2.50% which allowed a basis point fall in the equivalent maturity BTP (2.13%), while Bunds were off a little to yield 0.46% (+2bp). US Treasury yield also rose to 2.23% (+3bp). 10-year Gilts were unchanged at 1.31%, having endured a torrid week just gone where the yield rose by a massive 30bp. Carney’s comments very late into the afternoon regarding UK interest policy (more cautious) saw sterling fall, and might have an impact on Gilts on Tuesday.

As for credit, the iTraxx indices dropped to 50.2bp (-0.3bp) for Main and 222.1bp (-3.3bp) and fresh multi-year lows. The outlook is good, as judged by those willing, better sellers of protection. Whatever happened to being concerned about corporate default rates? We’re not – because they’re so low, and have been for years.

In the cash market, we had another positive session as we might have anticipated given the generally solid tone in the markets. The Markit iBoxx IG cash index was just 0.75bp tighter at the close, at B+107.8bp with a good tightening in the CoCo market as the feelgood factor fed through into higher yielding asset valuations.

The sterling corporate bond market closed unchanged. Finally, high yield corporate markets managed to tighten by just a couple of basis points on the iBoxx cash index – a little disappointingly admittedly, and the index closed at B+286bp.

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.