12th October 2017

Some think it’s all over

MARKET CLOSE:
iTraxx Main

56.0bp, +0.8bp

iTraxx X-Over

245.4bp, +3.3bp

10 Yr Bund

0.44%, -2bp

iBoxx Corp IG

B+105bp, -0.8bp

iBoxx Corp HY

B+273.8bp, -0.8bp

10 Yr US T-Bond

2.33%, -1bp

FTSE 100 , DAX , S&P 500 ,

..and they might be right!…

We are halfway through October and the big bonus so far for corporate bond investors has been performance preservation. It’s been a good year. Market rates have stayed in a tight range while corporate bond spreads have been tightening. So, both benchmarked and total return investors will be feeling good at the moment (on returns YTD which look like this: +2.0% for IG, +5.8% high yield and +13.8% CoCos).

But from the business of getting more corporate debt on board to help absorb those cash balances, IG investors must be feeling a little disappointed – if not anxious. There’s been a lack of supply for a while now – and little in terms of meaty deals. Some have argued that much of the IG issuance was front-loaded in that Q1/Q2 period. If true, we are going to get a below-average year for issuance, suggesting that the market is pretty much done for this year.

We don’t buy that notion of funding early. Why would that have occurred? We’ve sailed through every potential market derailing banana-skin event. Receptivity to deals is as strong now as it has ever been, too. We would suggest that issuers just don’t need the cash. They’re full, balance sheets bloated by years of gluttonous over-funding at low rates. We’ve had in excess of €250bn of supply for each of the past three years, and after the ECB’s QE programme, the idea that funding costs staying lower for longer was supposed to herald an even higher level of market issuance. It hasn’t. The current total is a touch under €216bn.

That is, the ECB’s involvement in the corporate bond market has been completely unnecessary. We suggested as much when they announced that they would add corporate bonds their QE programme. Spreads might have tightened anyway – and the index (iBoxx IG) is only 40bp tighter since QE started anyway. We get that in some years without ECB assistance. The economy has been doing well (relatively), by the way. Admittedly, they might have tightened by a lesser amount – but that might have been welcomed by market participants as it keeps returns higher.

As for issuance, it’s actually dropped since the ECB got involved. Maybe the low rate regime saw massive funding (longer dated too) in 2013-2016 and the need for more balance sheet liquidity isn’t necessary. After all, that liquidity needs to be reinvested, and there are risks associated with that! Front-end rates are still mired in deeply negative territory.

It’s been different story in the high yield market, and we have fleshed this out in previous recent comments to which we refer our readers.


Primary markets struggle to offer up much

The primary market continued to drip-feed deals into the market. Just one deal in IG non-financials came in the session, from Germany’s Innogy which took an increased €850m in a 10-year green bond offering at midswaps+57bp and 18bp tighter than the initial price guidance. And that’s just the third German borrower in IG markets since the beginning of July! The supply total for the month has now limped on, to a paltry €5.95bn and we face the likelihood of nothing appearing in today’s final session of the week. There was nothing from the high yield markets.

In financials, Dutch insurer ASR finally printed its €300m PNC10 Restricted Tier 1 CoCo issue priced to yield 4.625%. That’s the first such deal structure from a borrower in this currency.

Credit setting records still

The news flow in the session had us looking admiringly on at Eurozone industrial production which rose more than expected in August (+3.8% yoy). Sterling was weaker on talk that Brexit negotiations had were in ‘deadlock’. JP Morgan and Citibank earnings for the third quarter beat expectations. And US producer prices rose by the highest amount in 6 months (+0.4% in September), offsetting the dovish tone to the Fed minutes which were released on Wednesday. The opening dollar weakness was short-lived.

In the markets, we endured a fairly lacklustre session. There was little to get excited about anywhere. The economic news delivered and the earnings season has kicked off to a decent start. All that was as expected and so we are again back at that stage where we likely need a fresh push, although what the catalyst for that might be is difficult to judge right now.

Eurozone stocks were mixed in the session, but sterling weakness resulted in a better bid for UK equities for which the FTSE outperformed. US equities were flattish. Rate markets were barely changed, the 10-year Gilt yield left at 1.37% (-1bp), Bunds at 0.44% (-2bp) and US Treasuries at 2.33% (-1bp). Spanish risk regained some lure, 10-year Bono yields down at 1.62% before ending at 1.63% (-2bp) as Catalonian secession issues were off the front pages, for the moment.

Protection costs in credit rose, and Main was up at 56.0bp (+0.8bp) while X-Over closed at 245.4bp (+3.4bp) to reverse the previous session’s closes.

No such weakness in cash. The Markit iBoxx IG cash index tightened a little more, as it ground out 0.8bp to B+105bp and is just 3bp off the year’s low (11bp off record low), while the index yield fell further to 1.06% against a 2017 low of 1.00% seen in late August.

IG returns, as mentioned above, are at the best level for the year now – at 2.00%. We can say the same for the CoCo index, where an 8bp tightening in the session – leaving the index level at B+431bp and the index yield at 4.00% (-9bp) – saw returns rise to 13.8%! The record low yield is 3.93%, seen back in the summer this year. We’re just a session or two of tightening away from setting a new record.

In high yield, we set new index tights of B+273.8bp (-0.8bp) and the index yield declined to a new record low too, at 2.59% (-2bp in the session).

Have a good weekend.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ 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 CreditMarketDaily.com.