17th February 2017


FTSE 100
7,278, -24
11,757, -37
S&P 500
2,347, -2
iTraxx Main
73bp, umch
iTraxx X-Over Index
294bp, unch
10 Yr Bund
0.35%, -2bp
iBoxx Corp IG
B+134.7bp, +0.2bp 
iBoxx Corp HY Index
B+371bp, -1bp
10 Yr US T-Bond
2.46%, -2bp

What more did we want?…

We got the kind of week we expected. Admittedly, we have had €6.95bn of IG non-financial (but only from 5 borrowers) and it looks like it ought to have been a busy one, but the half-term break did put the brakes on the market. The news flow from the US has been good (economics) and bad (Trump), while from the Euro-area it has generally been good (economics) and mixed (earnings).

Yellen: Sweet-talked Wall St to record high

In that we had a hawkish-cum-pragmatic testimony from Fed chief Yellen which all combined have given a push to equities, just done enough to put government bonds under a little pressure while the corporate bind market has traded sideways to slightly better bid.

It’s almost incredible to believe that amid all the brouhaha around Trump, the confusion and disarray within his Government allied with concerns about some of the shenanigans around the French elections, that some markets have done so well. Equities are flying and the Dow is up 4.4% YTD while in Europe, the DAX is up 2.5%.

High yield credit has returned more than 1% too, while safe-haven risk is steadily giving back years of positive returns – down 2.3% for Eurozone government bond debt as measured by the Markit iBoxx index, for the year so far. IG credit is around flat in both spreads (versus benchmark) and returns.

More expansive US economic policy is the almost hidden subliminal driver for risk assets at the moment (US tax announcement to come), and markets are choosing to ignore the potential for political event-risk to spoil the current mood. Equities might be looking top – especially in the US, after a multitude of record-breaking daily closes for the S&P, Dow and Nasdaq, but the old “trend is your friend” cliché is difficult to trade against.

As always, it’s going to be in the timing.

Primary remains light…

Smiths Group leader Andrew Reynolds Smith. (Not to be confused with Morrissey)

Deals for the session took in only Smiths Group from the IG non-financial sector, for €650m and the triple-B rated borrower managed to tighten the pricing by 25bp versus the initial guidance. Admittedly, the issuer had no one to compete with, but it’s getting a little ludicrous that a deal can be tightened by 25bp – or even 15-20bp – as a market standard situation.

Surely the syndicates “know the market”, have done their “market due diligence” and have a grasp “for the level of demand for a deal”?

We’re sure no one is being taken for being a sucker, but investors must be rolling their eyes at the initial cheap guidance levels, knowing full well that an eye-watering cut in the spread is coming.

Anyway, with just a week or so to go for the month, we’ve now had €10.5bn of supply for February. Over €20bn was printed in IG issuance last February and over €40bn in February 2015. So we don’t buy into the earnings season putting a brake on the level of issuance. It has contributed of course, but is not the sole reason for lower levels of issuance. Some issuers it seems, just don’t fancy it at the moment.

BoE all guns-a-blazing

The Bank of England’s purchases under its corporate bond QE programme are now up at £7.1bn just four-and-half months into an 18-month programme to lift £10bn of IG non-financial sterling denominated debt. Last week’s purchases totalled £466m and close to in-line with the average weekly lift since the programme began at the end of last September.

BoE: £7.1bn and counting

In the session, spreads edged 0.25bp wider as measured by the Markit iBoxx index, and it would seem that the Bank’s participation in the market has only served to stop more weakness. The index is 1.5bp wider YTD.

Equities were a sea of red, but the index falls were very small and typically less than 0.3%. That is actually a decent effort, as some sort of pullback and consolidation was always going to happen after the previous sustained rises in stock markets. As for government bonds, prices edged up, leaving the 10-year Bund yield to drop a touch to 0.35% (-2bp) although Gilts were better at 1.26% (-4bp).

In the euro-denominated corporate bond market, spreads edged a touch wider for choice (noise) and the cash index was left at B+134.7bp (+0.2bp) in a lacklustre session. They’re 2bp tighter this week so far though.

The high yield market saw spreads tighter too, the index t0 B+371bp and the lowest level this year, just.

Have a good day, and weekend.

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.