21st March 2017

Secondary credit ploughs on

FTSE 100
7,430, +5
12,053, -42
S&P 500
2,373, -5
iTraxx Main
iTraxx X-Over Index
10 Yr Bund
0.44%, +1bp
iBoxx Corp IG
B+130.5bp, -0.25bp 
iBoxx Corp HY Index
B+365.6bp, -1bp
10 Yr US T-Bond
2.46%, -4bp

Grinding out performance

There should be little holding back risk markets into the end of the month following the relative ease in which we got through the Dutch election and Fed rate rise. They had injected a few nerves into the market. Now, there is little in the way to prevent a tightening in credit spreads amid what could be a deluge of issuance. Good primary issuance usually always injects confidence into secondary – it’s been many a year whence we fretted about weaker secondary on high levels of issuance – and we can look for spreads to continue to grind out performance. On a cash index level, they’re 4bp tighter in IG this year and we have had a good couple of weeks, and another couple of basis points this month are possible.

The European high yield markets have fared much better (-47bp YTD – Markit iBoxx index), but their ongoing performance might depend on the moves and the level of stock markets – as well as oil prices given the correlation we have seen between US HY and European HY. Oil has become a focus again as prices per barrel move lower on record high US crude inventory levels. Should this persist, then it might act a limiter on how far we might tighten in the high yield market.

Veolia Environnement: 2 €650m deals

We didn’t exactly race out of the blocks at the start of the week in primary. There were deals, but we were left a little underwhelmed although many mandates were announced. Insurer Liberty Mutual Finance was first up with a 7-year €500m deal priced 20bp inside the initial guidance. Veolia Environnement came up with a couple of €650m deals in 5-year and 9-year maturities, clipping the obligatory 18-20bp off the opening price talk, even as order books were only 2.5-3x oversubscribed. We’re looking for much busier days ahead with €10-15bn possible in IG issuance into month-end (final total close to €30bn).

Owens-Illinois tapped its 2024 issue for a further €225m in the high yield market. At around €6bn for the month so far, this is already the best start to issuance for several years for the high yield market, with supply so far this year in excess of €12bn already. Another couple of billion before we close out the month would be a reasonable expectation.

Financials dealt us HSBC which came with a 5.5NC4.5 transaction for €1.5bn, while Societe Generale issued a 5-year, €1.25bn senior non-preferred deal.

ECB not letting up

The ECB fell back to close to the long-term average of weekly accumulation of IG non-financial debt with €1,815m of debt purchases last week (€2bn+ previously). The total debt purchased – since the QE operations began – rose to over €72bn overall.

We think that the constant chipping away at the (largely) secondary market might be starting to have an impact, given that spreads have been on a consistent tightening trend these past two weeks. After all, their total purchases to date, after 41 weeks, stand at €72,243m and this is debt that will be held by the central bank until it matures.

We had 20bp+ of tightening (iBoxx index) in the weeks following the original announcement, but little traction since. In fact, we would argue that spread markets have actually disappointed when fundamentals and technicals have both been supportive for a more material tightening bias these past 6-9 months. That might be changing.

Recent ECB weekly purchases

The total accumulated debt remains at around 10% of the eligible market and implies an average weekly grab of €1,762m of IG non-financial euro corporate debt since they began operations a little over ten months ago.

Steady start to the week

The equity markets kicked off with little real direction, trading out around being a small up/down in the session with little by way of news flow or event risk to help prod them in any direction. Admittedly, the US Intelligence hearings might give us something a little more to think about soon enough!

Government bonds didn’t offer much, either, with markets having barely moved throughout the session. Bund yields were a touch higher, the 10-year yielding 0.44%, OATs 1.13% (+1bp) for the same maturity while Gilt yields declined to 1.23% (-2bp).

The latest polls in France have Macron and Le Pen as the likely victors in the first round as they pull away with clear water between them and the next batch of contenders, with a head-to-head between them to come in the second to look forward to. That ought to please the markets as the second round will see the usual collusion of the parties in order to keep Le Pen out.

In secondary credit, spreads moved a touch better with the IG corporate ending at B+130.5bp (-0.25bp) amid little to write home about, while the high yield was the same with spreads a touch better and the index at B+365.6bp (-1bp) …noise. The sterling cash market closed unchanged.

Finally, in the synthetic markets, the focus was on the roll from Series 26 to Series 27. We closed out the opening session of the new Series-27 with Main at 76.6bp and X-Over at 296bp.

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.