21st May 2017

In True Grit style

MARKET CLOSE:
iTraxx Main
63.1bp, -1.5bp
iTraxx X-Over
253.3bp, -6.3bp
10 Yr Bund
0.37%, +3bp
iBoxx Corp IG
B+119bp, -1bp
iBoxx Corp HY
B+327bp, -5bp
10 Yr US T-Bond
2.25%, +2bp
FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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Swatting aside the event-risk…

Is there nothing that can stop the bullish make-up of the markets? The furore generated last week around Trump’s ‘folksy’ personality which could lead to a possible eventual impeachment has been dismissed, and we’ve seemingly manoeuvred another potentially market-destabilising event. It was as short-lived a sell off as we could have imagined – it lasted a day – and we have already moved on.

And now we’re back with equities moving higher and trying to claw back as much of the losses of last Wednesday as possible, credit spreads are tightening again (well, being marked wider or tighter on the lowest of flows and volumes) and rate markets are slightly better offered as the safe-haven bid fades. Friday might only have had two borrowers in IG non-financials in the market, but that’s more than we usually get (!) – and we’re set up for a decent week of primary activity.

€600m primary deal: Baxter International

In the primary corporate bond market, US borrower Baxter International came with a €600m, 8-year offering at midswaps+75bp (-10bp versus the initial price talk) and the other deal of note came from consumer credit scoring group Experian which issued €500m in along 9-year at midswaps+70bp. Combined, they took the weekly supply to a very good €13.85bn for IG non-financials after €11.4bn the previous week and a paltry €1.8bn during the first week of May. The monthly total rises to €27,050m and we have to be looking in the context of €32-35bn for the full month – and ahead of the long weekend in the UK.

We know the high yield pipeline is fairly rammed and the €1,915m issued this month so far has underwhelmed given the levels of issuance in the opening four months, where the gross amount came in at €22.4bn. January and February’s issuance came in at €2.3bn and €3.7bn, respectively, and we ought to be looking for those levels to be surpassed in a final May flurry this week. That’s the hope, anyway.


Resilient markets fight back

The S&P500 is now just less than 1% away from its record high (a positive day’s trading this week will suffice), after rising 0.7% in Friday’s session. That rising tide of US equities had the effect of lifting all boats to make it a positive end to what was looking like a very difficult week. Across Europe, most equity indices closed in the range 0.4-0.7% higher.

The positive sentiment meant that the allure of government bonds was dimmed somewhat and yields headed higher as they sold off a little. So the 10-year Bund yield moved to 0.37% (+3bp) while the spread versus OATs narrowed to 43bp. Gilt yields edged up to 1.09% while the 10-year US Treasury was left at 2.25% (+2bp). It wasn’t very exciting.

In the credit world, secondary spreads moved tighter in a market better bid in line with the risk-on sentiment elsewhere. The Markit iBoxx IG corporate bond index moved to B+119bp (-1bp) which is still 5bp off the 2017 tights we recorded earlier this month.

And last week saw that 3bp of weakness, most of it coming into that midweek sell-off in equities. At G+142bp, the sterling market – as measured by the iBoxx index – has actually outperformed. The index barely widened last week, and that after the huge Gilt tap and £2.25bn AB InBev deal. Sometimes it pays to be out of the limelight.

Once again, the high yield market wasn’t the a hive of activity which would have promoted a massive push tighter given the scarcity of bonds in secondary. But we did move 5bp on the cash index to B+327bp – leaving the index 8bp wider in the week – and off the 2017 (and almost record) low.

A positive tilt in equities this week and we’re looking at having another push at the B+317bp record low, but with Trump on his travels we might be expecting too much. Supply, in our view, will only have a positive impact on spreads as it will inject some confidence into the market.

The iTraxx indices have hit multi-year lows into the record levels being set by equities and the better feeling around the macro outlook. We think that they can continue to edge lower from these levels. They reside at 63bp and 253bp for Main and X-Over, respectively and marginally off the lows set earlier last week.


Don’t be afraid

As more is bound to emerge around the Trump administration’s supposed love-in with the Russians, there is the possibility that we might be trading into a fairly choppy week to say the least. As suggested, markets have swatted aside many problem situations of late and we think that they will continue to do so. There’s life in this US administration yet.

What the US political shenanigans inject into the investment process is uncertainty and that means volatility. The macro machinery will continue to grind on through it and the signs are there  that we’re seeing some kind of stability globally. The economy might be blowing hot and cold in the US with upside limited if the eye is taken off the ball as far as the administration’s economic policy there is concerned.  However, we are warming up steadily in the Eurozone with Asia continuing its merry way affected mostly by what happens around US rate policy (which impacts FX and debt servicing).

So, we’re staying fairly constructive here and should expect to trade better – save for odd periods of volatility akin to what we witnessed last week. That could actually be the way the markets play out and most likely continue to be defined on event-risk around the Trump presidency.

At some stage, we will become numbed to it all. Trading it in credit means staying risk-on and, if possible – should liquidity emerge of course – buying dips. The corporate bond market from a fundamental perspective is in good shape. Our only risk right now is a global financial crisis – and that is very unlikely. If macro duly delivers, there’s little reason to believe that spreads will tighten while a back-up in rate markets will be very measured given the political headwinds sustaining a good bid for safe-haven assets.

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.