30th September 2017

Three down, one to go

iTraxx Main

56.6bp, -1.2bp

iTraxx X-Over

252.6bp, -3.3bp

10 Yr Bund

0.46%, -1bp

iBoxx Corp IG

B+106.9bp, -0.4bp

iBoxx Corp HY

B+281bp, -0.5bp

10 Yr US T-Bond

2.34%, +1bp

FTSE 100

7,373, +50


12,823, +124

S&P 500

2,519, +9

Yes we can…

We turn the page into the final quarter of 2017, but what matters most – new issue markets or performance? It wasn’t a great month for either just gone in credit. We still have more than enough room to absorb plenty of corporate bonds, while year-to-date performance has been very good such that we just need to hang on to what we’ve got.

IG non-financial supply in September came in at a below par €26bn and the first nine months of the year are recording €210bn of issuance. We’re €60bn short of last year’s second best total on record and €75bn short of the record supply in 2009. We would say that Draghi’s plan to get more issuance away at low spreads/yields/costs for borrowers hasn’t worked – not in IG anyway. It’s difficult even to quantify that the ECB’s corporate QE has had a noticeable impact on spread performance this year.

That’s because spreads have tightened just 27bp as measured by the Markit iBoxx corporate bond index. That could have happened anyway (and it has many times in the past) – and it isn’t a remarkable level of tightening. And that after the ECB has lifted some 15% (€113bn) of the market. We would think, though, that lower rates have had an impact on higher yielding debt – allied with a recovery in economics and banking sector credit quality.

Lower market yields have boosted the demand for higher yielding risk in both the corporate sector and for AT1/CoCo structures. So there has probably been an indirect nudge from the ECB to investors to take down this type of risk – and we have seen some excellent performance as a result in these markets. On a cash index basis, spreads are over 125bp tighter in HY and 220bp tighter in the CoCo index in 2017!

High yield supply for the opening nine months comes in at €48bn and we are just €9bn short of 2017 being a record year. We believe we will get to that record amount. After all, we have had several €5bn+ months and we know that the pipeline is rammed. So there is little reason why October and November can’t be kind to the high yield markets from an issuance perspective, but that assumes we avoid any prolonged period of the window slamming shut on event-risk grounds.

CoCo market on a high

September threw up a fairly messy month where performance was disjointed, particularly within the fixed income asset classes. Rate markets basically dictated the winners and losers for the month. Spreads generally held firm and we moved tighter in most cases, higher beta risk outperformed (shorter duration risk) while sterling credit had a difficult time of it as the Gilt market came under some considerable pressure (rate hike is nigh).

Geopolitics had an impact in terms of volatility, but less so than previously, likely because we have become so hardened to it, while the potential for ECB tapering added some pressure on Eurozone government bond yields.

Investment grade credit returns edged lower in September, but are still up 1.6% in the nine months to the end of September. Sterling IG spreads (Markit iBoxx) were flat in September, returns dropped 2% in the month and the year to end September performance fell back to +2.8% versus +4.9% in the period to the end of August.

The high yield market outperformed, with spreads around 20bp tighter in September and the nine month performance rose to 5.5% for this shorter duration market, less impacted by the rise in rates. 6%+ for the full year is not impossible and spreads for this market are just a few basis points away from the record lows seen in early August.

The AT1/CoCo market has also had a superlative year so far, the iBoxx index for this structured product recording a +13% performance in the opening nine months. We look for 15% as a target for the year.

S&P 500 Index in the last 12 months. Source: Google Finance

European equities had a difficult time of it in August, but recovered hard in September. The DAX is up 11.8% this year, having been up just 5% in the period to the end of August. Stronger sterling, higher rates and some Brexit fears saw the FTSE’s performance fall back to +3.2% in the opening nine months.

Once again, though, the US markets come out top. They closed September at record levels for the S&P and Dow and those markets have returns a stellar 12.5% and 13.4%, respectively.

Looking forward to Q4

We closed out September on the front foot, with risk assets offering a little rally. Away from the US markets, European courses edged higher and credit spreads tighter in the final session. The iBoxx IG cash index closed at just below 107bp and the HY index at B+281bp.

We might have an edgy start to October as we reflect on the weekend’s events around the Catalonian referendum which was threatening to turn ugly. The end of the week has the non-farms report and after a weaker jobs tally for August, we will probably see the same for September. That’s largely going to be because Hurricane Irma might have a distorting effect on the employment market, so we ought not to read too much into it. Any market weakness will be short-lived, we think.

The credit indices edged lower as the cost to insure corporate risk declined leaving Main at 56.6bp (-1.2bp) and X-Over at 252.6bp (-3.3bp).

And finally, on the primary front, we’re thinking in the context of €25-30bn of IG non-financial issuance this month and next, in part to make up for a lower than expected level of issuance in September.

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.