15th February 2018

Wobble over

MARKET CLOSE:
iTraxx Main

52.9bp, -2bp

iTraxx X-Over

268.0bp, -5.6bp

10 Yr Bund

0.76%%, unchanged

iBoxx Corp IG

B+87.7bp, -1.3bp

iBoxx Corp HY

B+301bp, -8.5bp

10 Yr US T-Bond

2.89%, -2bp

FTSE 100 , DAX , S&P 500 ,

The force is with us…

It’s been a good week for the markets in the sense that they have managed to stabilise, regain some much-needed composure and then move a little higher. This, following on from a fairly tumultuous couple of weeks previously. Equities are set for a decent run into the last week or so of the month.

Unfortunately, the sell-off in rates is going to see some decent hits for total return investors holding government bonds and corporate bond risk. Credit has lived a charmed life through all the volatility, but this last week in particular has started to see some persistent levels, albeit small, of weakness creeping in.

We’re still tighter year-to-date in investment grade but have moved off those record tights seen at the beginning for the month (+5bp), although we remain confident that we can recover to revisit those tight levels again.

Higher rates are a talking point for us, but we’ve seen little sign of an unwillingness by investors to pull away from the asset class. There is sidelined cash to put to work and inflows still find their way into corporate bond funds. We need supply. Good deals will install some confidence into the asset class and that will help the market tighten up again. Of course, it will matter that general market confidence is intact – and we’re seeing signs of that being the case. But supply has been a shocker this month.

In IG non-financials we’ve had just €8.7bn so far in February, and nothing for over a week. So investors worry that something must be wrong. Nothing is wrong of course. We’re in the earnings season (blackout periods), borrowers are rammed full of liquidity anyway and can bide their time, although coming unopposed now wouldn’t be a bad strategy.

Understandably, we’ve had under €2bn issued in the high yield market this month, but here we do need calm in equities and a higher level of confidence to get deals away (or have the borrower print with a more enticing premium). Overall though, that’s only a little over €10bn of issuance in IG and HY non-financials with just €1.75bn of senior debt, the rest being covered and SSA deals. Slim pickings, all being told.

In primary, the €250m from the unrated (probably 5Bs) Sixt in the session hardly excited, buy they managed to take 10bp off the initial guidance to price the 6-year deal at midswaps+105bp. They got away with that with the book at not even €400m, and they’re testing the market some as a result. At least the eventual pricing was at the wider end of the revised guidance (given as midswaps+100-105bp). There could be something brewing.

There is not a whole lot going on in the corporate bond market at the moment. Secondary spreads, though, have widened without there being the obvious and necessary flow behind it to just justify the level of weakness. There’s certainly no clear pick-up in the offered side of the market (perhaps HY aside) that would suggest otherwise.


Market on the road to recovery

There was little to feast on in terms of macro news flow in the session, but the tone was again upbeat as equities continued to recover. European stocks added up to 1%. And the US markets were also in good shape as they added 1% or more. Volatility was dropping too, with the VIX index trading a little below 20%.

And as we near the end of the earnings season, it should not be forgotten that it went by with little altercation and the signs remain good for Q1 and Q2, especially in the US with all those tax reforms and implications of them coming even more strongly into the equation. With global recovery also having some firm foundations (late into the cycle admittedly), we are not looking for any major mishaps on the corporate earnings/news front.

Equities can reach the heights of late January again anytime soon, but 3,000 for the S&P remains a reasonable target for year-end. Currently it is back through 2,700, having added now just 1.6% this year. It was up 6% at one stage. The Dow and Nasdaq share similar dynamics. Bitcoin is also in recovery mode, back at over $10,000 per coin.

Moreover, we didn’t have any material rate market weakness and yields in most government bond markets were unchanged to moving in a very tight range. The yield on the US 10-year dropped to 2.89% (-2bp), the Bund yield was left unchanged (0.76%) while the Gilt yield edged up a basis point to 1.65%.


Credit in from the cold

The exaggerated moves of late (wider on index), which has seen the synthetic market underperform cash by some margin saw some further correction in the session. Main dropped by its biggest amount for months (3bp) at one stage, before setting at 52,9bp (-2bp) probably not helped by choppy US equities. X-Over protection fell by almost 6bp to 268.0bp.

In cash, primary was just that X-over implied rated Sixt deal. Secondary, though, was in a better mood, leaving the Markit iBoxx IG cash index at B+87.7bp (-1.3bp) with little to excite in flow or volume terms. And as we might expect, the contingent convertible market squeezed tighter by 20bp on the index and was left at B+335bp. Liquidity is extremely poor and the daily moves a reflection of that.

The super illiquid corporate sterling market has taken bit of a bashing, with the iBoxx index for sterling corporates up at B+132bp (-2bp on Thursday) which is 14bp off the pre-crisis tights seen two weeks ago.

Finally, for the high yield market, the index tightened by 8.5bp to B+301bp. The 8bp of tightening in the session is a fair reflection of the high level of illiquidity in this market with the ebb and flow of the markets highly dependent on the level of equities.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ 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 CreditMarketDaily.com.