30th August 2018

Trouble ahead?

MARKET CLOSE:
iTraxx Main

67.2bp, +1.5bp

iTraxx X-Over

293.7bp, +5.8bp

🇩🇪 10 Yr Bund

0.35%, -5bp

iBoxx Corp IG

B+134.5bp, +0.5bp

iBoxx Corp HY

B+393.5bp, +7bp

🇺🇸 10 Yr US T-Bond

2.86%, -2bp

🇬🇧 FTSE 100 6049.62, ERROR 🇩🇪 DAX 12489.46, ERROR 🇺🇸 S&P 500 3152.05, -12.23

Maybe, but it’s looking good at the moment…

Credit is delicately poised at this moment. Stable growth dynamics should help to offset fears some might have about reducing their exposures following the ECB’s QE exit. There hasn’t been a rush for the exit in any sense, but there has been a healthy reassessment as to how the market might react once the ECB no longer participates.

Then it comes back down to (as it always has) supply/investor demand/asset allocation and the specific fundamentals of the asset class.

Spread upside will depend on the broader macro environment where any reduction in trade tensions will be most welcomed, an improvement in economic growth will aid credit metrics/fundamentals and confidence gleaned from higher equities will boost a tightening in spreads.

Nevertheless, up until this point in 2018, it hasn’t always gone swimmingly well for the asset class with IG total returns for the year to date at -0.30% and cash index spreads 37.5bp wider. And that is after a lower than expected level of primary activity and an average of €4bn of monthly purchases by the ECB this year. For August, the IG asset class has returned -0.1% on iBoxx index spreads widening by 8bp (Eurozone sovereigns off 0.6%).

The summer holiday period is effectively over, we’re awaiting supply dynamics to improve into that final push into the end of the year. The weakness in spreads is a big surprise, but the total return boost (helped by the rally in the underlying) has helped to offset much of the concerns.

US equity markets aside, it’s been difficult in other markets. For instance, the DAX is off around 3% this month and in the region of 4% for the year – when only a fortnight ago it looked like it was dragging itself back into the black. Thursday wasn’t kind to German equities. In the UK, the FTSE has also lost 3% in August but just over 2% for the year – and that after all the Brexit-related political infighting, a very volatile sterling currency and much uncertainty around those Brexit negotiations.

Those US markets have outperformed all their peers, though. The S&P and NASDAQ have been recording fresh record highs this week, with the S&P up by 3.3% this month and up by a stunning 9% this year so far! Trump is bringing it back home – be it the repatriation of foreign earnings or the industrial labour force. The US is big enough and diverse enough and powerful enough to make it work for them, and it looks like the markets are playing into it, trading higher as growth surprises to the upside (Q2 GDP remember up at a higher than expected 4.2%) and inflation remains at target level (core PCE at 2%).

Even the Treasury market at the moment is playing ball, with the 10-year stuck below a yield of 3% (at 2.86%) where normally we would have every right to expect that yield to be well over 3% now. There might be trouble ahead – there likely will be, but right now, the omens for a steady push higher for risk asset prices is on the cards and looks to be the way forward. And that just might help sustain other markets at current levels (at worst) or help propel them a little higher, too.


Ready for a September flourish

The month’s penultimate session turned out to be a quite defensive one. The Turkish lira took some further punishment as the market there re-opened after a 4.5-day Eid holiday – not helped on news that one of the central bank’s deputy governors had resigned, while Italy managed to get €7.75bn of funding away in 5-year, 7-year and 10-year maturities – but at the highest costs in four years. The broad defensive tone saw stocks lower across the board and a better bid emerge for government bonds.

The EU offered to do away with all US car import tariffs if the US reciprocates and we still have the key NAFTA agreement between the US and Canada to be signed and sealed – before Friday’s deadline.

The 10-year Treasury yield declined to 2.86% (-2bp) and the 2s/10s flattened a basis point to 20bp, again. The equivalent maturity Bund yield was also lower, at 0.35% (-5bp) and its recent skirmish with 0.40% being just that – a skirmish. The debt auctioning Italy put pressure on the yields there, the 10-year BTP yielding 3.22% (+9bp). The 10-year Gilt yield declined to 1.45% (-4bp).

In credit, we had a high yield rated deal in the market, the first such offering since the opening day of the month. Swedish/Finnish still group SSAB AB offered up €150m in a 5-year maturity at 3% (books at €340m). Better late than never, leaving us with just €990m of high yield paper now being issued in August from three borrowers.

The synthetics moved wider, with iTraxx Main up 1.5bp at 67.2bp and X-Over was 5.8bp higher at 293.7bp. In the cash space, IG cash was under a little pressure amid the usual low flow, and the iBoxx index moved 1.5bp wider to B+134.5bp adding to the weakness we have seen in every session so far this week. In the high yield market, we saw some weakness too, and the index was 7bp wider at B+393.5bp.

It will be the quietest of sessions on Friday.

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.