20th June 2017

Somewhere over the rainbow

iTraxx Main

55.6bp, +0.3bp

iTraxx X-Over

232.1bp, +0.8bp

10 Yr Bund

0.26%, -2bp

iBoxx Corp IG

B+115.3bp, -0.5bp

iBoxx Corp HY

B+302bp, -2bp

10 Yr US T-Bond

2.16%, -3bp

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DAX (live)

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S&P 500 (live)

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Our pot of gold…

There are so many market records being broken at the moment, it’s becoming hard to keep track of them. We ended off the intraday record highs in the DAX while the FTSE, S&P, Nasdaq have seen and done it. High yield spreads in Europe and funding costs for all issuers reside at record low levels.

On Tuesday, BoE Governor Carney slapped down the Monetary Policy Committee regarding the potential for a UK rate increase against the backdrop of higher (imported) inflation but a declining economic outlook (weak consumer confidence and business investment). Gilts immediately rallied.

So, there is a whole lot of exuberance out there but is it so irrational given the policy situation, the Goldilocks nature of the global growth environment and, as importantly, where the absolute level of market rates are.

Admittedly, negative cashflow-generating tech companies are easier to argue against in terms of bubble dynamics, but there’s always the promise of what tomorrow might bring that supports and continues to inflate their valuations. The banking sector is in recovery mode following a torrid 8-year crisis spell, but is now buffeted by higher levels of regulatory capital and hope, for example, that a sustainable economic recovery might promote steeper curves and higher levels of profitability – somewhere down the line.

The rate markets – manipulated by years of central bank policy – remain extremely accommodative so that funding costs on the one hand, and investment on the other sees cash funnelled into the real economy. That’s the hope.

There’s also a ‘herd instinct’ in the investing process occurring. In credit for example, investors are piling into the markets – through primary – just to get invested and reduce some of those cash balances where returns have been negative for some while, as they are effectively penalised for holding that cash.

Bremer Landesbank: In the news for the wrong reasons

But they’re adding risk where they might not hitherto have been comfortable with. They’re adding the highest beta bonds that their portfolio can take. CoCos, corporate hybrids and then high yield. How many have gone into the single-B territory comforted by the fact that the default rate is low, looks like it is staying low and are hoping the coupon payments and principal repayment come good over the next 3-7 years? There was bit of a blooper as Bremer Landesbank cancelled interest payments on its CoCo issue payment due next week.

To us, it makes sense that high yield markets are where they are. Rich for sure on an historical basis, but the background (as indicated above) suggests this is actually something which probably makes sense. After all, what else is there?!

Credit busy with deals

Three-tranche deals have become the new fashion for the spring/summer of 2017. Maybe it’s four tranches because we’ve had a few of those late, with AT&T being the last borrower, for example.

British Telecom made what seems like a relatively rare foray into the markets as the Italian-scandal affected operator came with a three-tranche deal of maturities taking in 5-, 7- and 10-year deals for €2.3bn and managed to get 15-17bp off the initial price guidance. The group issued almost €4bn back in 2016.

Following BT was another three-tranche deal in a debut offering from French electricity transport group CTE. They offered 7-, 11- and 15-year bonds for a combined €2.92bn priced finally some 15bp inside the opening guidance. This issuance took the total for the month to a very respectable €20.62bn. With eight sessions to go, we’re likely going to exceed the €30bn we had originally targeted for this month.

Elsewhere, we had a €300m issue from Arion Bank which opted for 3-year funding, while BNPP took senior non-preferred funding in a 7-year maturity costing midswaps+70bp. The high yield market drew a blank which is unusual for this market of late.

All change and no change

Chancellor Hammond’s Mansion House speech might have signalled an end to austerity in the UK, but for Italy, it was a case of tightening up their belts for a little longer with spending cuts exceeding €60bn in 2017 and 2018. The afternoon session on Tuesday was a weaker one for equities as the recent rally ran a little out of steam as oil prices came under some more pressure. Off from an intraday record high we came as the DAX ended 0.6% lower and others followed suit with the FTSE 0.72% down, while the CAC was just 0.3% lower.

In government bond markets, 10-year Gilt yields dropped to 1% again (-4bp) while the 10-year Bund yield was down at 0.26% (-2bp) and 34bp inside the OAT where the yield fell to 0.60%. 10-year US Treasury yields fell back as well, 2.16% (-3bp).

And one asset not breaking records is the oil price. It has failed to hold above $50 per barrel for any meaningful period in the last couple of years and currently sits at less than $46 per barrel (Brent).

In credit, the late equity sell-off resulted in the cost of protection to insure credit rising a little. Versus the previous day’s close, Main was up o.3bp to 55.6bp while X-over edged up to 232.1bp (+0.8bp) – and the moves higher really just a bit of noise.

As for cash, the Markit iBoxx index for IG corporate bonds continued to edge lower and was marked at B+115.3bp (-0.3bp) at the close – and the rally in the underlying saw to it that the index yield dropped to 1.06% (-3bp). The sterling corporate market closed unchanged.

As for high yield, it is a case of how low can you go? The index tightened to a new record level of B+302bp (-2bp) and could well see us break that 300bp level in Wednesday’s session. By the way, the index yield dropped to a new low of 2.28% (-3bp).

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.