6th January 2017

The going is good, so let’s get going

MARKET CLOSE:
FTSE 100
7,195, +6
DAX
11,585, +1
S&P 500
2,269, -2
iTraxx Main
68bp, unchanged
iTraxx X-Over Index
286bp, unchanged
10 Yr Bund
0.24%, -3bp
iBoxx Corp IG
B+134.6bp, unchanged 
iBoxx Corp HY Index
B+390bp,-5.5bp
10 Yr US T-Bond
2.36%, -9bp

Ready and willing…

Arion Bank: Additional €200 million tap

We didn’t expect any of that! It’s fair to say that we have had an almost blockbuster start to the New Year in this opening week. We’re on the front foot from a macroeconomic news flow perspective (with upbeat PMIs and inflation data), equities look well poised to rise further and set new record highs into it (UK and US – with the Dow Jones so close to the historic 20,000 level), while fixed income investors are rightly a little nervous in these opening sessions as to the fate of the government bond market in terms of prices (lower) and yields (higher).

The corporate bond market has held up well from a spread perspective and the supply has been plentiful from all areas of the market except HY. We have had a plethora of SSA, covered and senior bank deals. There has been a CoCo/AT1 transaction, a couple of Tier 2 deals and several IG non-financial corporates have also been in attendance. And here, the pricing dynamic has barely changed with initial guidance transformed into a serious ratchet tighter (typically 15-20bp) for the final pricing of deals. It seems that enough investors were around and willing to help get these deals away – easily.

There is confidence in abundance and the feel-good factor ought to be sustained through next week.

Yesterday’s session was littered with deals. BFCM, Arion Bank and BBVA lifted €2.45bn between them in senior debt, Allianz printed €1bn in subordinated debt while investment group Berkshire Hathaway opened the account for US companies  with a 2-tranche €1.1bn effort. FCE and Autoroutes du sud de la France were the day’s non-financial IG borrowers taking €1.75bn of money. The rest was covered bonds.

So for the corporate bond market, it really is all about primary – as ever – in these opening weeks of the new year. As a reminder, we got off to a very poor start last year as we fretted about oil prices and the quality of the economic recovery. Macro jitters fed into asset price volatility and all that curtailed issuance in both January and February.

January 2016 saw barely €5bn of non-financial issuance while a good recovery in February saw the two months pitch up a combined €28bn. Already this week we have seen €5.5bn of supply from IG non-financial corporates – and all with an auto flavour – not uncommon as we start any year.


Macro looking up

The pace of job growth as evidenced by the US ADP survey may have come in lower than expectations – and have an impact on today’s non-farm payrolls for December – but the economy in the US is doing just fine! December’s ISM non-manufacturing report delivered a 57.2 reading, which was above expectations, and new orders and production continued their improvement against some weakness in employment growth. The readings this week in Europe on inflation and various UK economy readings have also been upbeat.

Equities have had a couple of indifferent sessions, but the omens for stocks look good at the moment. We will need more data over the coming weeks though to judge whether the good end to last year is following through into 2017 (likely, after all why shouldn’t it?). If it does turn out that way, potential event-risk around Trump’s inauguration – or market jitters rather – might be avoided, and the positive economic tone have a lasting impact on the government bond market. That is, yields could be in for a bit of a rise from these levels.

For now, they’re holding. The 10-year Bund yield was down at 0.24% (-3bp) while the equivalent Gilt yield declined to 1.30% (-4bp). In the periphery, probably on renewed banking jitters or reduced ECB participation in bonds, we had Portuguese yields up at 3.99% and Italian yields on 10-year maturities up at 1.93% (+5bp). For equities, the Dow pulled back from the 20,000 index level and has some work to do before it gets there. European stocks did very little and mostly closed at almost unchanged!


Corporate market firm in secondary

Spread markets held steady, unmoved by the significant activity in the primary market. There is much interest to get invested (usual redemptions, any new inflows, existing cash balances) as investors kick off the year in exuberant fashion. That’s a boon for borrowers!

Anyway, the Markit iBoxx IG cash index closed out completely unchanged in the session and is also unchanged for the year in this opening week. The IG index yield, though, is a few basis points higher. The IG sterling denominated debt market has done better. That index was a basis point lower in the session – and is 3bp lower this week.

The HY market, quiet on the primary side, is seeing some interest and that is allowing spreads to grind better. The iBoxx index for HY is down at B+390bp (-5bp yesterday) which is already 22bp tighter in the week! Better economic data will make sure that the default rate stays low and credit metrics improve. Little supply and the shorter duration nature of the asset class will see good interest for this higher yielding asset.

Finally, the iTraxx indices closed out pretty much unchanged at 68bp (Main) and 286bp (X-Over) in a fairly uneventful session – and where equities failed to offer much of a boost.

Non-Farms are up next. Have a good weekend. Back on Monday.


 

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.