3rd July 2017

The song remains the same

MARKET CLOSE:
iTraxx Main

54.9bp, -1.1bp

iTraxx X-Over

244.2bp, -3bp

10 Yr Bund

0.47%, +1bp

iBoxx Corp IG

B+113.4bp, +2bp

iBoxx Corp HY

B+296bp, +2bp

10 Yr US T-Bond

2.35%, +5bp

FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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New chapter, playing the same game…

A new month, the second half of the year and after a serious wobble a few sessions ago, we go into it maintaining the same strategy. That’s because the credit market is exhibiting less weakness and volatility than either rate or equity markets, and so it is easier said than done that investors maintain their current positioning bias.

Corporate bond market valuations have held up and investors have been resolute in maintaining their positioning. That would change if, well, something changed, like ‘I want my money out’, but there is little – or no – sign that this is going to be the case.

With this shortened US holiday week and Fed minutes coming up, we’re unlikely to get any sense of any change in direction and in a sense – and are therefore likely going to write this week off. And then we’re into the start of the summer holiday season. Still, we got off to a decent start as equities recouped some of last week’s losses but the better tone didn’t feed into the corporate bond market which was slightly better offered, while little happened in duration markets (yields trying to correct lower if anything, perhaps).

There were no deals to distract or occupy investors although plenty to work on given the new announcements and ongoing roadshows. We dare think that some will emerge in the next few sessions even if the US markets are closed.

Admittedly, returns haven’t been great for IG credit  but only because the underlying has sold off although the yield range on the Bund hasn’t seen the number exceed on other the lower or upper end (0.20 – 0.50%). The front-end has remained relatively well-anchored and so higher beta debt (usually shorter dated) has performed very well (HY index based total returns YTD at around 3.8%).

It means that we stay long risk as spreads have managed to hang on to their gains into the recent volatility. That’s a small overweight versus the benchmark in duration and easily having a portfolio bias which is skewed towards lower rated debt. That means close (or full) on HY allocations which are allowed as part of IG portfolios (usually 15-20%) and now running an overweight on financials versus non-financials given the potential for more recovery and stability in the banking sector.


Government bond yields holding the range

This year’s big expectation was for the return to a sustainable growth footing in the Eurozone and then a back-up in yields on the follow on expectations of higher growth and less accommodative ECB policy. Interestingly, for example, 10-year Bund yields have failed to break out of a nine-month range established between 0.20 – 0.50%, as mentioned above.

The same goes for US Treasuries, where the 10-year yield has failed to jump north of 2.50% for any relevant time, or below 2.20%. At the close, 10-year Gilt yields were up at 1.27% (+1bp), Bunds at 0.47% (+1bp) and OATs at 0.83% (+2bp). Treasuries were up at 2.35% (+5bp).

That has kept the interest in credit at an elevated level especially as front-end Eurozone government bond yields remain negative up to around 7 years (Bunds) and holding cash is costly. We happen to think that this is generally going to remain the case for this year.

Anything around returns of 1% for IG and 4% for HY will therefore be a good year for these markets. For this to happen we will need spreads to continue to grind a little tighter and/or hold these levels. That’s a reasonable expectation given that macro should be supportive for fundamentals and technicals are not about to turn against the asset class.


Corporate spread tightening stalls

As the title suggests, the corporate bond market had another good session, with there being no supply and tightening into the risk-on mood. Stock markets were in the black from the start, the DAX up 1.2% and the FTSE almost 1% with the US opening better, too, ahead of the US Independence Day holiday. US manufacturing grew at its fastest pace in 3 years with the June ISM up at 57.8 versus 54.9 in May, while June’s year-on-year car sales dropped more than expected.

The indices took their cue from the rise in stocks though, and iTraxx Main closed 1.1bp lower at 54.9bp while X-Over managed to fall by 3bp to 244.2bp.

Cash didn’t quite follow, with investment grade a little weaker and the Markit iBoxx IG index up at B+113.4bp (+2bp) but with little flow to justify that weakness – and in a fairly uneventful session.

At G+135bp for the iBoxx index, the sterling market closed unchanged. With deals galore on the way, the HY market closed a touch better offered for choice at B+296bp (+2bp).

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.