7th September 2017

Straight-batting it

MARKET CLOSE:
iTraxx Main

53.25bp, -0.75bp

iTraxx X-Over

233.1bp, -2bp

10 Yr Bund

0.30%, -4bp

iBoxx Corp IG

B+112bp, +0.4bp

iBoxx Corp HY

B+302bp, +2bp

10 Yr US T-Bond

2.05%, -6bp

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Leader of the pack…

He’s not the messiah

The messianic complex which the market finds itself transfixed in when it comes to the ECB’s Mario Draghi smacks of desperation. The ECB’s commander-in-chief held sway on Thursday and activity in the markets came to a grinding halt.

Are we so ‘all one way’ in our thought and investing process that stepping away from the sentences he utters – and then dissecting them – that we look for clues as to the bank’s next step in order to gain a few basis points of advantage in our positioning? We’re surely not that bored, nor should we be hostages to fortune.

We know that the ECB is reacting still to the fallout of the 2007 economic crisis – inflation is persistently low and the euro’s strength is annoying, even if growth currently looks a little perkier. We know also that they will reduce QE in due course. And that they might even see fit to raise rates – in 2019!

For now, though, rate markets will keep government bond yields anchored at around these levels. Equities will react to the macro news flow and we think are likely be anchored or go higher from these levels. Credit should remain better bid and we will focus on primary to get invested, with returns firmly in positive territory so long as rate markets behave. The rest is all noise and gives us something to fret about – or otherwise – on a daily basis.

As for the ECB meeting, they didn’t change anything. The refinancing rate was left at 0% and the deposit rate at -0.4%, both in line with expectations. The QE bond purchase programme at €60bn per month was also left unchanged. At the press conference we got forecasts for inflation which were lowered by 10bp for 2018 (to 1.2%) and by 30bp in 2019 (to 1.3%) with the ECB keeping an eye on the strength of the euro.

Alas, Draghi maintained his confidence that inflation would hit the ECB’s target and that we would just have to remain patient amid the need for persisting with the current accommodative policy stance. How long’s that piece of string?

Growth for 2018 and 2019 was revised 10bp higher to 1.8% and 1.7%, respectively. And decisions on the future QE beyond December would not be taken until October – probably! So basically, we got little material news from the day’s events in an underwhelming session by the ECB, except that the markets will now be expecting some concrete decisions on QE at the next meeting.

In our view, there is little reason as to why IG spreads haven’t been much better bid this week. Secondary flow is light and we know that there are better buyers for choice. But there may have been some apprehension on the potential for an announcement with regards to curtailing the ECB’s corporate sector purchase programme. At least enough for the Street to maintain a defensive bias – but that should recede now.

We might also think that there was some concern over the Korean situation which has spooked a few, and maybe there is some weakness (sellers) because of the expectation of swathes of issuance to come.


Markets calm, and trading up

Cortefiel: A €600m deal in HY

We had some better-than-expected growth data from the Eurozone with growth accelerating by 2.3% in Q2, and higher than previous estimates. That was the main macro news flow of the session which was otherwise preoccupied with the ECB press conference.

Generally, the week has played out according to expectations. We have had a couple of days of very good issuance that has delivered almost €2bn for high yield, a paltry €1.5bn for senior financials and €6.6bn from nine issues (seven borrowers) for IG non-financials.

We’ve had sterling deals and the now obligatory SSA issuance aplenty. And we are set up for much more over the following weeks. We can think in context of high yield supply exceeding €6-7bn and IG issuance exceeding €30bn easily, perhaps closer to €40bn even for September. After all, the average for a September in the previous three years is around €33bn and the current run rate year-to-date is similar to that of last year.

There were no deals in euro-denominated primary (IG non-financials and senior financials) in Thursday’s session, while Cortefiel slipped in with a dual tranche deal for a combined €600m in the high yield sector. British Land took 12-year funding in sterling for £300m while Iceland Bondco priced a £550m 7.5-year deal to yield 4.625%.

Rate markets took their cue from the Draghi’s musings and rallied a little, the 10-year Bund yield at 0.30% (-4bp) while the front-end also rallied. The US 10-year yield was down at 2.05% with little obvious reason as to the catalyst for such a drop (-6bp), and the equivalent maturity Gilt was left to yield 0.98% (-2bp). European equities were higher by up to 0.7% while the US was more mixed.

The backdrop of it all was that we maintain the status quo and that will be good for the corporate bond markets. The demand for safe’ish, higher yielding fixed income product stays intact. The ECB is still lifting over €1bn of IG debt a week. Macro isn’t a worry and inflows into predominately IG funds ought to be supportive factors. Whatever, we’re looking for spreads to resume their tightening trajectory in both the high yield and IG sectors.

For the iTraxx index, Main edged lower to 53.25bp (-0.75bp) and X-Over to 233.1bp (-2bp). The cash market was left with the Markit iBoxx IG index at B+112bp (+0.4bp) while the index yield fell to 1.00% (-3bp) – and the lowest yield level this year for this index. High yield edged a touch wider too, the index rose 2bp to B+302bp. All a little confusing!

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.