1st Mar 2017

Strong finisher

MARKET CLOSE:
FTSE 100
7,263, +10
DAX
11,834, +12
S&P 500
2,364, -6
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
292bp, -2bp
10 Yr Bund
0.21%, +1bp
iBoxx Corp IG
B+137.5bp, unchanged 
iBoxx Corp HY Index
B+376.7bp, -1bp
10 Yr US T-Bond
2.39%, +3

Looking on the bright side….

Tuesday saw a €4bn 4-part issue for the US drugs giant

That was an almighty busy end to the month – to any month, for corporate bond investors anyway. No excuses that we need time to assess the monthly and YTD fund performances, or that we’re squaring up portfolios and assessing strategies for March as we think about how to close out the first quarter. It was deals galore.

A 4-parter from Pfizer, followed by a deal from Iberdrola and a small issue from Energy Finance kept the corporate IG non-financial market busy, while we had NAB slip in with a green bond for the senior financials market.

Government bond markets held steady, leaving them to cap off a very good month after a dire opening one. Equities traded a little more on the news flow – or rather the potential for it – with Trump due to address Congress. February has had its moments, but we’re looking at how fixed income markets have recovered after that difficult January. Strategies for March ought to stay as they are, but performance will depend on external event/risks that come with US politics and the Dutch/French elections.

If nothing goes awry, we can expect a little volatility but it to have minimal impact on the market. After all, we have got through the Brexit vote and Trump with little altercation. Chances are that the Dutch elections will not derail anything around the Eurozone, while the Front National is not expected to see a winner after the second round of votes are cast in early May in France. With that in mind, there is the non-trivial potential for an upbeat economic outlook given that we expect a fiscal tidal wave of cash to hit the US economy. That rising tide will lift all boats, for a period of time.

Equities will be the biggest winner. Benchmarked credit portfolios will also fare well, but fixed income total return investors might see an erosion in performance given that bond yields might come under pressure – in sustainable fashion, finally. That’s something for the latter half of Q2. And assumes much.


Primary markets close February with a flourish

Investment grade issuance disappointed for most of the month, but we have ended the month in fine form. We had €4.25bn on Monday followed by over €5bn yesterday. And we passed the €50bn year-to-date mark. US drugs giant Pfizer took the attention with a 4-part issue lifting €4bn in total in 2-year floater format and fixed deals with 3-year, 5-year and 10-year maturities. They managed to reduce the initial pricing guidance by 15-17bp in the process.

National Australia Bank: €500m

Other deals came from Energa Finance for €300m at 2.25% for a 10-year maturity, while Iberdrola’s green bond at midswaps+63bp was priced 15bp inside the opening teaser spread for €1bn. The total supply for the session came to €5.3bn and for the month, a much more respectable €23,935m.

In the high yield market, we saw €3.7bn of issuance from eight borrowers and we are already well ahead of last year. We drew a blank in yesterday’s session, but that does come after €1.55bn on Monday. There are several deals in the pipeline as well as borrowers on the road, and we might expect March to top February’s issuance.

Senior issuance came in fits and starts. Yesterday’s €500m from NAB took the monthly total to €11.8bn and the run rate year-to-date just below what we saw last year. We’re at around the €32bn mark so far this year, and we still target somewhere in the order of €140bn for the full-year.


February’s performance warms

It’s equities that lead the charge both for the month and YTD. European equities closed the session barely changed. However, the DAX returned 1.5% in the month and the FTSE a very good 2.3%, representing a decent pick-up versus January’s performance for them both. For the year to date, those equity indices have returned 3.1% and 1.05%. Recall that the FTSE had been in the red in January. US indices have done even better up over 5% YTD!

In much the same way, for fixed income investors, February has been excellent. At least in the sense that the rally in government bond markets through the month reversed a fair degree of the decline seen in January and reduced the losses YTD from a total returns perspective. That, after a poor month which saw January return -2.5%.

So, in February, Eurozone government bonds, as measured by the Markit iBoxx index, returned +1.1% leaving returns for the first two months to come in at -1.1%. We’re going to need a decent rally through March in government bonds for us to get back closer to being in the black for the first quarter. We think it is unlikely.

In credit, sterling has returned 1.6% YTD after returning a stunning 2.6% in February on the back of the massive rally in Gilts.

We closed the session with spreads unchanged for IG credit, leaving the iBoxx index at B+137.5bp, and returns for the month up at 1.2%. For the year so far, that’s +0.45% but much has been gained by the rally in the underlying and a bit of carry, with spreads on the benchmark 3bp wider in the month.

The high yield market closed a basis point better with the Markit iBoxx index at B+376.7bp – and almost 4bp tighter in the month. The index returned +0.9% in February and is up 1.4% in 2017. The index spread is 37bp tighter this year, with this market having a particularly good time of it. The synthetic indices closed with Main at 73bp (-1bp) and X-Over at 292bp (-2bp) – and they’re 1bp and 2bp wider, respectively, this year.

No reason why primary can’t get off to a good start in today’s opening session of the month.

Have a good day.


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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.