24th May 2017

Why the trend really is your friend

iTraxx Main

62.4bp, +0.4bp

iTraxx X-Over

253.5bp, +2.1bp

10 Yr Bund

0.40%, unchanged

iBoxx Corp IG

B-+118.2bp, unchanged

iBoxx Corp HY

B-+319.4bp, -1.5bp

10 Yr US T-Bond

2.26%, -2bp

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Drift into mediocrity

With Thursday being Ascension Day, it  will most likely extend the break into Friday’s session which means this week comes to a premature end. The markets have had a decent few days, spending most of them recovering last week’s Trump-related losses. With just a few trading sessions to go before we close out the month, it does now seem like we will get through it with some good performance to book.

In an ‘end of the week’-like session, we traded out calmly with a few issues in primary to help us along the way. Even China’s downgrade by Moody’s went largely unnoticed. There was little else on the macro-economic front although the ECB’s latest financial stability review did state the obvious when relating to the risks of an abrupt withdrawal of the ECB’s extraordinary stimulus and the impact that might have on bond markets.

In credit, we’re beginning to see – more often than not, some quite aggressive price action in primary high yield where deals are being tightened up into final pricing versus the initial price talk. IG market yields have been declining again – following a period where they were around 20bp higher in the December to March period. And we think this might finally have provoked some investors to allocate more to the high yield sector after a considerable period where yields in IG, generally, had been very low (and are declining again).

For instance, the Markit iBoxx index yield for IG corporates is 1.16%. In the period from July to October 2016 it was below 1% (low 0.79%) – and has been above 1% in the months before July 2016 & after March this year. So, there is an understandable sense of frustration at the consistently low yields (and hence low returns) that IG credit offers – just 0.75% YTD. High yield total returns are up at 3.3% on spreads almost 100bp tighter!

Most investors now have mandates which allow for between 10-15% of high yield rated debt to be accumulated in a typical IG portfolio. Few are going to be shy in coming forward to add HY risk. Especially now, given the meagre returns IG credit offers. This is also one area where the ECB may have succeeded in their crowding-out effect of forcing investors to take on greater levels of risk in order to disintermediate HY corporate funding.

The first step has been a success (finding a willing investor) but the second, in terms of seeing a greater level of capital markets activity/issuance from high yield rated corporates, hasn’t been. As with IG markets, there has been no discernible pick-up in issuance as a direct result of the ECB’s QE policy.

The sucker punch will come when the trade unwinds. That happens when we either get 1. rotation into equities from credit or 2. a dash for the safety of government bonds on the back of a global financial crisis. We don’t see either of them occurring this side of 2018, at least. Go with the trend.

Deals for everyone

The markets were not exactly busting to get risk on board and we traded out through a limited, rangebound-like complex. At least there were a few deals to contend with ahead of the break – and something for everybody.

€1bn dual tranche deal for the data centre provider

The triple-B rated Global Switch took 15-20bp off the initial price guidance with a dual tranche deal for a combined €1bn in 7-year and 10-year maturities. NN Group followed also with a dual tranche offering, for €900m in a 3-year and 6-year funding where a 3x subscribed book allowed them to lop 15bp off the opening price talk.

We do not expect any issuance today and Friday/Monday is unlikely to see anything, either. It means that with two sessions to go thereafter before we finish up in May, the total IG non-financial issuance is up at €33bn – the second best month (so far) for supply in 2017.

The high yield market had Ansaldo Energia for an increased €350m in a 7-year deal yielding 2.75% where final pricing was reduced by 25bp versus IPT, also off a 3x oversubscribed book. Sterling high yield had Heathrow Finance to look at which came with a £275m to yield 3.875% in a 10-year maturity offering. In financials, Nykredit Realkredit took €300m in a 5-year maturity SRN structure.

The rest stays calm, too

A holiday-like feeling transcended the markets elsewhere. The S&P passed 2,400 again, and was just 3 points still off its record high, while the Nasdaq was as close to its record high too. Eurozone equities were mostly in the red but by only a small amount. There was little in the macro news flow to suggest a meaningful move otherwise. Indeed, government bonds also played out fairly unmoved.

In the synthetic credit space, iTraxx Main was up a touch at 62.4bp (+0.4bp) as was X-Over, also better bid and left at 253.5bp (+2.1bp) but in a fairly uneventful session – and both off their intraday lows. They want to go lower!

Finally, cash credit in IG closed unchanged with the index left at B+118.2bp. In line with better (US) stocks, the high yield market was looking perkier and spreads were tighter. The index closed 1.5bp tighter at B+319.4bp. There wasn’t much flow or activity.

On a housekeeping note, we’re taking advantage of the European holiday to do some website maintenance.

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.