30th October 2017

Sun breaking through the gathering clouds

MARKET CLOSE:
iTraxx Main

50.6bp, -0.8bp

iTraxx X-Over

228.2bp, -3.8bp

10 Yr Bund

0.37%, -2bp

iBoxx Corp IG

B+99.1bp, -0.9bp

iBoxx Corp HY

B+262p, -2.5bp

10 Yr US T-Bond

2.38%, -5bp

FTSE 100

7,417.24, -1.78
DAX

13,008.55, -6.49
S&P 500

2,597.08, -1.95

Yes, we can…

The corporate bond markets have had a super October so far, although equities have done much better – but we will not scoff at the numbers for fixed income markets.

IG credit’s performance, measured by the Markit iBoxx index, has seen returns of +0.9%, HY the same while the CoCo index has recorded a massive +3% in total returns for the month. Even the Eurozone sovereign index is up by +0.7%.

Against equities, where the S&P is 2%, the Dow 4.5% and the Nasdaq 3.3% (DAX 3.5%), we would say that the fixed income markets have held their own. And the performance numbers for the year-to-date for corporate market total and benchmark returns are at totally unexpected high levels. Right now, though, there’s some event risk in the air around the Spanish/Catalonian situation (although receding), but more so on the Robert Mueller investigation into Russian interference in the 2016 US election.

Although one can never totally be sure, the impact from either is unlikely going to be a market-derailing event. There is still too much money in the system for that to be the case. There was bit of caution in the market on Monday, but we would think that we can close out the month and head into the final weeks of the year looking to hold on to the gains garnered thus far – and with an eye to adding to them.

So, a typically tentative start to the week, and there’s always temptation to use the month-end to stay sidelined and square up the books as an excuse. The evolving US situation, with Trump’s campaign manager Paul Manifold charged, added much caution to the session in the US. We had a mixed tone overall, where activity was always going to be light into the start of the FOMC meeting on Tuesday while we wait for the Fed communique and so on, to come Wednesday. Thereafter, November should be fairly clear for the markets to push-on but we are needing to manoeuvre the inevitable periods of event risk which will be thrown at it.

The day’s economic news flow was extremely upbeat everywhere we looked. German retail sales for September came in at a very strong 4% (versus expectations of 3.4%), Eurozone economic confidence in October was the highest since 2001, US personal spending in September rose to the highest levels since the crisis began while even Spanish debt and equities rallied hard on easing concerns around the Catalan independence situation. Equities there rose almost 2.5% (outperformed) while 10-year Bono yields dropped to 1.50% (-8bp). That rally helped BTPs to record solid gains too, with the 10-year Italian benchmark lower at a yield of 1.85% (-10bp). German inflation missed (to the low side) and so probably gives policy makers every excuse and justification in keeping their foot (gently) on the pedal as far as policy accommodation is concerned. Goldilocks is everywhere.


Primary a drag

In Monday’s session, we had no plain vanilla corporate bond supply to think of – and, on Tuesday while the FOMC start their deliberations, there’s a good chance that little or nothing will get done. Rate decision day on Wednesday will likely also mean we’re looking at another damp squib of a session. And why shouldn’t that be the case? After all, October failed to live up to the billing for investment grade issuance which so far stands at €18bn, but at just €28bn for the year-to-date. We are just behind the average run rate of the previous five years, which is unexpected given that funding costs are only going to rise going forward. Maybe corporates really are rammed full of cash and no longer to add anything else to their burgeoning balance sheets, for the moment.

IG’s lack of issuance is the high yield market corporate bond market’s gain. Not only does the HY market trade at record tights, but supply here has broken the previous record. The month is one the best – if not the best – in history for issuance, with issuance approaching €14bn while the year is already the best in history with €62bn worth of deals. The pipeline is still good and if macro remains supportive, which it looks like it will, then even marginally higher rate markets will not be enough to stymie the supply side of the market. Investor receptivity is also at elevated levels with flows into IG portfolios meaning that there is more room still for higher yielding debt (from a percentage allocations perspective) from this investor base as well.


ECB weekly purchases increase

The ECB reported that the latest week’s purchases of non-financial corporate debt came in at €1,761m and up €461m versus €1,300m in the prior week. Much will be made of the bank’s reduced monthly purchases from January (€60bn to €30bn) but there is a good chance that they keep going at €7bn per month of IG non-financial corporate debt at the expense of other programmes.

That should help keep IG continuing to grind tighter and eventually through the record lows (as measured by the Markit iBoxx index).

ECB Weekly Purchases

The total purchases to date, after 73 weeks of market participation and intervention, stand at €121,218m with the long-term weekly average purchases to €1,660m. The ECB owns some 17% of the eligible market (of around €700bn).


Credit simply shaking all over

Stirrings on the US political scene, speculation around Trump’s nominee for the Fed Governor’s chair, an upbeat stream of economic news in the US & Europe and calm on the Iberian front all concluded with us trading out in mixed fashion. European stocks had a positive bias about them but without any gusto as they ended a small up. US stocks had the Dow and S&P lower but there was a bid for US Treasuries, leaving the 10-year yield lower at 2.37% (-5bp). Gilt yields also dropped a couple of basis points, the 10-year closing to yield 1.33% (-2bp). The rest as was above.

In the credit markets, there was clear risk-on tone as observed by the synthetic indices and cash markets. For both, it’s almost euphoric as we close the month. They were better offered (lower) such that iTraxx Main was at its lowest level of the current contract at 50.6bp (-0.8bp). X-Over went the same way, lower by 3.8bp at 228.2bp.

As for cash, the investment grade market moved to within spitting distance of a record low for the Markit iBoxx cash index which was 0.9bp tighter at B+99.1bp (B+94bp record low). And it is the first time it has broken through 100bp since Q1 2015, The CoCo market crunched tighter and the index tightened to B+380bp admittedly amid little activity, but highlights the demand for higher yielding risk product. 3% returns for this product (indexed) for the month is huge but returns are up at a superlative 16.5%!

And finally, in high yield, there was only ever going to be one direction as far as spreads were concerned into the upbeat tone seen elsewhere in the corporate bond markets. There wasn’t any volume to write home about, but tighter saw the index at B+262bp (-2.5bp).

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.