3rd May 2017

The countdown has started

FTSE 100
7,250, +46
12,508, +69
S&P 500
2,391, +3
iTraxx Main
65.6bp, -1bp
iTraxx X-Over Index
260.6bp, -5.4bp
10 Yr Bund
0.33%, unchanged
iBoxx Corp IG
B+121.9bp, unchanged 
iBoxx Corp HY Index
B+344bp, -5bp
10 Yr US T-Bond
2.29%, -4bp

Tick tock, tick tock, tick tock…

Manufacturing in the UK and the Eurozone is in rude health. The equity markets are going higher and overvalued on most historic measures of value, but they march on relentlessly nevertheless. Rate markets are playing out rangebound with yields capped as a better bid emerges on largely geopolitical event risk but wanting to push higher as recovery dynamics become more apparent.

Credit had a great time of it in April, too, from a performance perspective, but once again the primary market for corporate bonds has stalled. The pipeline builds in the meantime and we’re going to get a flurry of issuance in due course. Without that booming primary market, credit has become a difficult market to get excited about but we will take the ‘boring is good’ tag for now. Any excitement means we are ratcheting tighter (like last week after the election result) or widening aggressively.

The clock is ticking meanwhile to the Sunday vote in the second round of the French election. There might be a heightening in market nervousness because while Macron is the clear favourite to win – and retain the status quo (good or bad), there is never a dead-cert/guarantee as far as investing is concerned. So we will not be surprised if credit protection levels rise a little into it, or if safe-havens get a better bid and equities do not push on into the end of the week. The Bund-OAT spread might widen too, but how much will possibly depend on how the polls play out, and will (likely) be a different story next week – although any relief rally will not be as huge as the one we saw after the markets opened for business following the first round result.

We’re into the beginning of the third week where we have barely had a deal to look at in the IG non-financial market. The last one was Brussels Airports and that was for just €300m. Admittedly, there was the late Easter break, the earnings season and French elections – and then the May Day holiday to contend with, but just one deal in over two weeks with markets clearly risk-on is a poor return. It’s as if we need this week out of the way before primary can re-open with all guns blazing.

In the meantime, we’re going to believe that there will be a deal or two this week to take down, while the lack of competing supply ought to have borrowers clearly looking at this week’s window of opportunity.

In secondary, cash spreads continue with their daily grind (usually tighter) amid limited flow and volumes with the high yield market again outperforming.

ECB weekly corporate bond purchases fall again

The latest ECB investment grade, non-financial corporate bond purchases came in at a reduced €1,218m and was a drop of €264m versus the prior week – and we seem to have a trend being established such that the ECB is probably tapering its corporate bond purchases. That is, after €1,692m three weeks ago and €1,482m two weeks ago, last week has seen a further significant drop in purchases (see chart).

The much lower than long-term average of weekly accumulations (€1,750m per week over the life of the programme) does now seem to represent a lower level of purchases from the bank given the reduction in overall bond purchases from €80bn to €60bn per month. And that €1.2bn will be the new average level of weekly lifts by the bank (-25% versus that previous long-term average).

ECB weekly purchases tapering off

The total purchases to date, after 46 weeks, stand at €82,262m.

US auto sales set the tone

Unfortunately, the big three auto manufacturers missed on April sales and we’re starting to see the slowdown many had anticipated. This cast a bit of a pall over the session’s market direction (Tesla reports today) with signs that while the jobs market and wage increases are holding up/increasing, consumption growth is beginning to falter.

Anyway, stocks in Europe managed to hold in the black with markets up to 0.7% higher, the US was left in a small range around unchanged (!) and government bond markets were slightly better bid, for choice. The Bund-OAT spreads edged tighter to 42bp.

In credit, primary delivered nothing in the corporate sector in euros or sterling, while Nestlé plumped for a small deal in dollars. With the FOMC and non-farms ahead of us, the best we’re going to hope for is a deal or two today and/or possibly by Thursday (as suggested above). Otherwise, it’s all about seeing what next week holds.

In the secondary market, we closed unchanged for IG corporates and that Markit iBoxx index left at B+121.9bp. There was, however, a better feel to the HY market, with spreads tightening up some more and the index dropping to B+344bp (-5bp) and now some 70bp tighter so far this year. That’s also the lowest level in 2017 for both indices. Even the sterling IG market was better bid and the index moved to the lowest level this year at G+147.7bp (-1bp).

And finally, the iTraxx indices were better offered (lower) with Main at 65.6bp (-1bp) and X-Over outperforming in line with the cash markets performance at 260.6bp (-5.4bp).

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.