10th September 2017

Roll up your sleeves

MARKET CLOSE:
iTraxx Main

53.4bp, +0.1bp

iTraxx X-Over

234.1bp, +1bp

10 Yr Bund

0.32%, +0.2bp

iBoxx Corp IG

B+112bp, unchanged

iBoxx Corp HY

B+301.3bp, -1bp

10 Yr US T-Bond

2.05%, -1bp

FTSE 100

7,377, -19

DAX

12,303, +7

S&P 500

2,461, +3

Let’s get on with it…

Another ECB meeting is over with little new with which to furnish us with, so we now have the opportunity to give September’s performance a real push. We’re none-the-wiser as to how the tapering of the central QE effort will play out ether, nor as to its timing.

The sticky low level of Eurozone core inflation has us all firmly thinking that the eventual rate move isn’t coming until 2019 at the earliest. And so, yields in the meantime are treading water at new lower levels than seen of late – or might even head lower – as the markets taken on a more defensive bias.

And so the low yield environment continues into its eleventh year. We’re blowing hot and cold on the economy and that Goldilocks description feeds well into current valuations. Ultimately, and a theme with which we ran with last week – liquidity (there’s plenty of it) – will find its way into assets where returns safely exceed those of cash.

That means corporate bond market investors can only anticipate and position for continued upside. Primary remains the first port of call for their money, but we expect that the better bid we saw for higher yielding risk (especially COCo/AT1) will resume.

Indeed, since the beginning of the year, investors are sitting on total returns from this sector of over 12% (and they’ve been through a couple of events too), but we suspect closer to 15% or more of returns are possible for the full-year. For that to happen, we need the macro environment to remain as accommodating as it is. Who needs a sustained, massive push higher in growth!?  We also need the geopolitical event-risk to subside, however, and there are some signs of that with the Washington/Pyongyang jousting a more tame (and off the front pages at least) this past week or so.

Risk markets moved in mixed fashion last week. US stocks were understandably lower (Hurricane Irma event risk), the DAX moved higher even in the face of the stronger/rising euro while in rate markets, a US Treasury market-led rally saw to it that bond yields declined everywhere.

The 10-year US yield closed the week at 2.05%, the DAX at 0.32% and Gilts were yielding 0.99%. Eurozone government bond index returns are now positive year-to-date. Credit was focused on the new issue market and spreads ended the week close to unchanged.


Primary window wide open

John Deere issued a combined €850m in primary

Last week’s primary finished with deals on Friday totalling €1.5bn as Eni and John Deere got their funding away. A long 7-year for €650m at midswaps+57bp (-13bp versus IPT) was Eni’s effort, while John Deere took combined €850m in 3-year floater format and 6-year fixed. The week’s total amounted to €8.7bn for IG non-financials.

We’re on track for that €30bn+ level. There was nothing at the end of last week (Friday) in high yield, which saw over €2.5bn issued in the week. Senior financials also drew a blank in that final session, with €1.5bn this month being issued.

The other deals on Friday came in sterling with property group Akelius Residential taking £300m in 8-year funding costing them G+183bp, while Discovery Communications printed in a 7-year maturity for £400m at G+185bp.

The re-rack in rate markets suggests that funding conditions – levels, costs and receptivity to deals – remain in favour of borrowers. There is little stopping them now over the next few weeks in getting deals away although we might come up against a couple of slower sessions into the next FOMC around the 19/20th of this month.


We’ve reflected, now time to work it

Secondary market valuations have come under a little pressure of late, rather the drift wider has come because there is little activity and equities have been mixed for the best part of a couple of weeks. While we are flattish on the week, we are about 8bp wider since the beginning of August as measured by the Markit iBoxx index (at B+112bp).

The record low is B+94bp and we think that, all things being equal, we can still test those lows over the coming weeks. The rally in the underlying has seen to it that the 1.02% index yield is the lowest seen for over a year, but the record low in the sub-0.80% area isn’t likely to be tested.

In the high yield market, the €2.5bn of issuance last week didn’t move secondary at all, with the cash index holding the B+300bp level. We’re almost 30bp off the record lows seen in July.

If the IG market is going to tighten then this one will, too, and quicker given the disproportionate tightening dynamic this more illiquid market entertains. There has been much warning of late as to how rich this market has become. But if we believe in the Goldilocks scenario for the economic outlook, then it can become richer still (and likely will).

The week ahead is going to focus on the hurricanes hitting the US. Insurers will come under pressure, just as they have done last week. Their CDS levels (reinsurers) have risen only modestly as compared to a more significant impact on them in times of war or financial crisis.

The storms will likely curtail any meaningful equity market move (higher) while we might expect rate markets to sustain a better bid, for choice. Credit will all be about primary markets, which we believe will deliver.

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.