28th January 2019

Tough get going

MARKET CLOSE:
iTraxx Main

74.5bp, +1.6bp

iTraxx X-Over

326.3bp, +4.8bp

🇩🇪 10 Yr Bund

0.20%, unchanged

iBoxx Corp IG

B+166bp, -0.5bp

iBoxx Corp HY

B+497bp, unchanged

🇺🇸 10 Yr US T-Bond

2.75%, unchanged

🇬🇧 FTSE 100 6104.73, (+1.71%) 🇩🇪 DAX 13066.54, (+2.36%) 🇺🇸 S&P 500 3431.28, (+0.67%)

Timing is key

The upcoming first FOMC meeting of the year, a ramp up in the earnings season, Friday’s non-farms payroll report and the next stage of the Brexit debate with a series of votes due (on Tuesday) will all make for this week to be a rather disjointed one – with opportunities to get some business done needing investors to be spot-on with their timing.

As we might have expected, we endured a tentative start to the week, meaning there was little direction in markets – until US markets opened amid several poor earnings reports, and lower we went. Stocks were clearly weaker largely on the back of the subdued 2019 outlook from bellwether giant Caterpillar and rates were eventually better bid for choice. Credit was treading water (moderately tighter if anything), even as we managed to get a couple of corporate bond deals away.

Into the last week of the month and, generally, we have had a decent recovery in markets after a difficult start – Monday’s session notwithstanding. The Dax is up by almost 6.5% this month, the S&P in the region of 6% with the FTSE lagging (flattish) as the hope of a soft (or no) Brexit has sterling in rally mode thus dimming the relative lure of UK equities.

Continuing macro concerns amid a spate of poor data from China, the Eurozone (especially German manufacturing) as well as a global growth downgrade from the IMF have left rates to trade out in a narrow range and barely moved this year for the key 10-year benchmarks. The 10-year US Treasury is at 2.75% (+6bp in January) but has been as low as 2.54% this month.

The Bund yield has seen 0.15% while it sits now at 0.21% with little sign that it will rise much more anytime soon. The ECB was in a dovish mood last week, while the prospect of a hard Brexit will keep this market better bid as it adds another level of uncertainty into the Eurozone’s economic outlook.

And credit? Well, it has slowly managed to claw back all – and more – of the early New Year weakness and sits nicely poised. It must be in a position to take advantage of the more dovish central bank tone. With macro slowing but a ‘cliff-risk’ situation which causes a deeper downturn than envisaged likely evading us anytime soon, then demand for higher yielding corporate risk could hold up.

Already we have seen a trend where higher beta assets in primary, be they sovereign, high yield or at the lower end of the IG rating spectrum have solicited the best level of interest with books 3x or more oversubscribed (and typically by 4x or 5x). It helps also that deals are performing, with the majority of this year’s offerings above water in spread terms.

It has helped the IG iBoxx cash index tighten by 6bp representing a tightening of 12bp from the wides we saw mid-month. Some run. Higher beta sectors (the CoCo market, for example) have fared better.


Snippets from primary

The Spanish multinational broadband and telecommunications provider took €1bn in a 5-year

The deals in the session came from Telefonica in IG non-financials, as the Spanish borrower took €1bn in a 5-year at midswaps+90bp. That was almost the now obligatory 20bp tighter versus the initial guidance with an order book exceeding €5.4bn. It took the total deals for the month to €24bn which is a very good effort from 30 separate issues and 20 borrowers.

The corresponding month in 2018 dealt us €18bn of deal flow, but that was amid a very difficult and more volatile period. Mind, the near €24bn seen so far this month sits towards the top end of volumes we have seen in any January since 2014, as can be seen below:

Elsewhere, the other transaction came from Sydbank in senior financials with the bank lifting €500m in a 3-year maturity, senior non-preferred at midswaps+140bp (-15bp versus IPT).


Earnings sully the opening session

The Caterpillar earnings report set the tone for the afternoon part of the session. The machinery giant is a proxy for global growth and the group painted a difficult picture for 2019. In addition, chip maker Nvidia took a hit after it sharply cuts it Q4 revenue forecasts. The Congressional Budget Office suggested that the government shutdown knocked $11bn in total off US economic activity.

European stocks were not going to recover on any hopes of a leg-up from the US markets and we played out the session heading a little deeper into the red.

The Dax eventually closed 0.6% lower, the FTSE almost 1% and, at the time of writing, the US markets were all over 1% lower. Government bond markets were more mixed for much of the session but eventually beneficiaries of a late rally, the 10-year US Treasury yielding 2.75% (unchanged after being higher earlier in the session), the Bund in the same maturity 0.20% (unchanged) with the equivalent Gilt closing at a yield of 1.27% (-4bp).

The credit indices have had a good run as broad market confidence has eaten into protection costs. We saw some reversal on those weaker equities in the session, with the iTraxx Main index at 76.1bp (+1.6bp) and the X-Over index 4.8bp higher at 326.3bp.

In cash, we saw outperformance versus index and equities. The IG market was stable to perhaps slightly tighter for choice and the iBoxx cash index closed at B+166bp (-0.5bp). The CoCo market was unchanged to slightly wider while in high yield the market closed unchanged.

Have a good day.


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.