4th June 2017

She’s back!

iTraxx Main

61.8bp, -0.6bp

iTraxx X-Over

247.9bp, -2.6bp

10 Yr Bund

0.27%, -3bp

iBoxx Corp IG

B+118.8bp, unchanged

iBoxx Corp HY

B-+320bp, -1bp

10 Yr US T-Bond

2.16%, -6bp

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Goldilocks was just hiding.

We’re not exactly punching the air, but credit market investors can sit very comfortably through the summer months. Rate markets are unlikely to derail performance by much this year.

That was always the fear, but after that weaker-than-expected payroll number last Friday which was accompanied by a miss on wage growth, it looks like the US is neither blowing too hot or too cold.

And so the Goldilocks dynamic of that economy continues for a while yet. We dare say that the markets will ride out the US June rate hike (a certainty) and most likely fret less than usual about the timing of the next  – and final one for 2017 (?).

The net effect was for a rate market rally and a good old flattening in the US curve. Equities were flattish to higher as they grapple with the potential impact on growth, but we would think that they will move higher in due course on the back of the prospect of continued easy, cheap and plentiful liquidity.

For corporate bond markets, the data was just about as perfect a set we could expect. The asset class retains a low default rate, there will be a continued low rating drift rate (supportive upgrade/downgrade ratio) and money stays invested looking for that higher-yielding safe-haven asset. We should see a continuation of a steady stream of issuance; The high yield market is going to perform even more (spread and returns) and the sorts of returns garnered so far this year look well set to rise.

Maybe we should be high-fiving. IG spreads are going to feel some squeeze here, the high yield market – already 100bp tighter in cash (iBoxx index) – will go some more and rate markets are going to play out at the bottom end of (or below) the established ranges. For US Treasuries that means 2.20 – 2.50% and for Bunds that is o.20 – 0.50%, in the 10-year part of the curve. The front-end for the latter will remain anchored.

And borrowers will rest easy knowing that they can pretty much bide their time and pick their moment as to when to pull the trigger on a deal. After all, what’s the rush? There is little need for corporate treasurers to grapple with the annoying issue of too much balance sheet cash earning next to nothing. That is, markets and investors are going to remain receptive to primary deals for the whole of 2017, at least.

Records broken, getting nervous?

The US pulls out of the Paris climate accord but we have yet another political wobbly that has failed to derail global markets. But it was that non-farm report which was responsible for the rally in the risk markets. And so we recorded another record closing high in the US for the S&P/Nasdaq, the FTSE up there too as was the DAX.

Earlier, the Nikkei had closed above 20,000 – a rare feat these days. Valuations are looking stretched on traditional measures, but it is difficult to position against the trend because we could continue rallying for a while yet.

In government bond markets, there was a better bid too, as rate markets adjusted to potential growth and policy implications of that NFP data. The 10-year US Treasury yield dropped 6 points to 2.16%, the Bund to 0.27% (-3bp) and Gilts headed a touch lower again to 1.04%. So a positive start for all asset classes in June’s early skirmishes, but driven by disappointment and, uncertainty around macro – or more rather around the US economy.

As for credit, the secondary markets came to a standstill. That was understandable given the focus on the non-farm report – but we also had the opportunity to digest the heavy levels of supply of late. The cash markets closed unchanged into the little activity and the Markit iBoxx IG index was left at B+118.8bp.

That is all fairly unremarkable, while we had a similar situation in the sterling market, although spreads edged better to G+138.2bp (-0.3bp) as investors focused on a rare £400m offering from LVMH as it continued to raise funds to refinance the Christian Dior acquisition, and a £400m deal from Ardagh Packaging yielding 4.75%.

In high yield, the better equity backdrop failed to push spreads on by much, leaving the market better bid for choice and a touch tighter with the HY iBoxx index at B+320bp (-1bp). Although the index yield fell again to 2.93% and the lowest level on record. There lies the dilemma and opportunity for investors and issuers, respectively.

For investors, do they keep chasing the market and spreads (tighter)/yields (lower) as they seek to carve out some incremental performance from these record low levels? We believe they have little choice but to fulfil their mandate commitments. For borrowers, the opportunity is clear given the demand side of the equation as mentioned, but also the record low funding costs.

That limited movement suggests that we might get some traction through this week as the lumbering secondary market plays catch up with better stocks. The evidence for the better tone in credit was seen in the iTraxx indices – the now well-established risk proxy for corporate markets. Main closed at 61.8bp (-0.6bp) and X-Over at its lowest level for several years at 247.9bp (-2.6bp).

Primary set to deliver

Konecranes: €250m deal

Two sessions in, and the tally stands at €500m for IG non-financials and €1.2bn for high yield corporate issuance, the latter taking down €250m on Friday from Konecranes. We’ve come out a recovery month in May after a dire April for IG issuance while the high yield market suggests we might be on for a record year for issuance.

For this market, there is little excuse to break previous supply records. There might a lull in activity around Wed-Fri into the UK elections, but the month is otherwise fairly clear for borrowers to get their funding needs in before the summer break.

The current totals for IG and HY non-financial issuance stand at €128bn and €26bn, respectively. The former should see us comfortably through €150bn come the end of June – and perhaps closer to €160bn YTD by then, and €31-32bn for the latter would have us on course for a potentially solid year’s issuance.

This week we contend with the UK election, with a good idea of the eventual winner and make up of the next government by 10/11pm on Thursday. There is a bunch of US data which will be keenly watched including factory orders and ISM data while former FBI boss James Comey’s testimony to the Senate Intelligence Committee (also on Thursday) will be most keenly watched by Trump! The ECB also meets on this day, but is expected to leave everything as it is.

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.