7th November 2017

Tensions rise in Middle East

MARKET CLOSE:
iTraxx Main

50.2bp, +0.8bp

iTraxx X-Over

227.3bp, +3.8bp

10 Yr Bund

0.33%, -1bp

iBoxx Corp IG

B+95.3bp, -0.1bp

iBoxx Corp HY

B+252.2bp, -0.5bp

10 Yr US T-Bond

2.31%, -1bp

FTSE 100

7,678.79, -5.18
DAX

12,561.42, -124.87
S&P 500

,

…but they will soon pass

The markets have had a bullish disposition about them for the best part of three months. Record closes again in the US overnight and a solid rally in Asian stocks, with commodities heading higher helped by that shake-out on the Saudi domestic front along with rising tensions with Iran (oil at 2-year highs) gave us every reason to trade through a rather mixed and eventually weaker session.

A very positive European open was soon faded, with equity indices closing out up to 0.7% lower. It is certainly a case of ‘baby steps’ as far as European equities are concerned, as they make any gains with a more cautious stance versus their global peer groups. And that’s fine, it’s perfectly natural to trade this way and we are hoping that there are no major event-risk driven lurches lower that would ultimately impact the corporate bond markets.

No such impact or fears at the moment, as we had corporate bond mandates being dished out left, right and centre suggesting a fairly busy end to the year to come, while the day’s primary activity threw up a decent amount of deals for investors to take down. Against our previous expectations and judgement, the primary markets are in good form, and look to be making up for the lack of issuance we had since September. IG issuance is playing catch up with the average pf the previous few years, while the HY market is setting new records with each deal printed and at €63bn we’re looking at close on €70bn by year-end (€57bn was previous annual high in 2014).

Far from being a difficult year where rate markets would hammer returns for fixed income investors and all the prizes would go to equity markets, we’re seeing the rising tide lift most asset classes. Equities are on top by far (+15% Dax, for example), but credit markets have delivered way in excess of expectations (IG almost 3%, HY over 6% and CoCos over 17%), while even duration risk is showing small positive returns. And now, with oil heading higher it is giving commodity markets a late boost too, which might have some ramifications for macro/inflation into 2018.

The disarray in UK politics is intensifying on many fronts and was probably the reason why Gilts felt a bid behind them, leaving the 10-year to yield lower at 1.24% (-2bp). It didn’t help that retail sales for October suffered their worst ever monthly performance. Elsewhere, the safe-haven markets were just better bid (US Treasuries 2.31% and Bunds 0.33% yield, 10-year maturity), while peripheral risk got some support leaving Bonos to yield 1.41% (-5bp) and BTPs 1.70% (-8bp). It seems like the high/low beta compression trade isn’t confined to just the HY/IG market.


Effusive primary markets

There were plenty of deals in the markets with SSA issuers (EFSF, Lithuania) prominent along with a couple of covered bond offerings (CFF, SEB).

€500m in a PNC5.5 hybrid deal: Ferrovial Netherlands

In the corporate bond sector, IG non-financials made do with Daimler, Ferrovial and a 2i Rete Gas tap. The former took €1bn in a 10-year deal at midswaps+25bp (-5bp versus IPT) while 2i Rete Gas tapped the October 27 issue for a further €180m at midswaps+65bp. The pick of the bunch was Ferrovial Netherlands which issued €500m in a PNC5.5 hybrid deal costing 2.125% on books exceeding €3bn.

That’s €1.73bn added to Monday’s issuance in non-financials of €2.55bn and the monthly total so far goes to €6bn. Year to date, it leaves us at a perkier looking €233bn. That total makes 2017 the 5th best on record for IG non-financial issuance – but we’re going to need another €26bn before year-end to match the €259bn issued in 2014.

There was nothing in the high yield market, but we did have BNZ issue €500m in a long 5-year senior deal, while BFCM opted for Tier 2 funding of €500m in a 10-year deal. Akelius Residential took €500m in the Reit sector.


Mixed markets

European equities shot lower into the close after that bright start and even US stocks opening and trading the early session in the black – and of course, setting new records – couldn’t help pull them back into positive territory. As for the US, we saw more intraday record highs being achieved early on, but they eventually spent the session dipping in and out of the red/black, perhaps feeling a little more cautious as Saudi/Iran tensions rise.

In credit, the synthetic iTraxx indices drifted wider, along with those equity markets reflecting the potential for the emerging risks to take hold, and so higher credit protection costs saw Main rise 0.8bp to 50.2bp at the close, while X-Over moved 3.8bp higher to 227.3bp.

Anyone looking for that 1.5bp of index tightening in the IG market so that we can achieve a record low for spreads on the iBoxx IG index would have been disappointed. The market closed pretty much unchanged, left at B+95.3bp (-0.1bp) and still 1.3bp off the historic lows. And that was the story for the session, which was quiet with little by way of flows and volumes and essentially unchanged across the IG space.

In the high yield markets, bereft of any issuance, the index edged a touch better, left 0.5bp tighter at 254.2bp. That’s a good sign amid the weakness in equities.

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.