14th February 2017

Anything but a Monday in February!

MARKET CLOSE:
FTSE 100
7,279, +20
DAX
11,775, +108
S&P 500
2,328, +12
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
295bp, +4bp
10 Yr Bund
0.34%, +2bp
iBoxx Corp IG
B+136.25bp, -0.5bp 
iBoxx Corp HY Index
B+377.25bp, -2.5bp
10 Yr US T-Bond
2.44%, +3bp

Hmmm, let me think…

4-year and 8-year deals: McKesson Corporation

Not a lot, but at least something the chew on. McKesson Corporation became the latest US entrant into the euro (and sterling) debt markets while Securitas was the other borrower. That was probably the best we could have expected in an otherwise fairly dull session.

There was a bit of small-time M&A as Heineken was agreeing a $700m deal to buy Kirin‘s Brazilian business while the EU was busy with new forecasts for EU growth (small up – but UK a huge increase for 2017 from 1% to 1.5%).

Risk assets were generally better bid in the session; We saw moderate weakness in government bond markets and credit played out in a small range as markets settled down for expectations of a limited week (given the half-term break in the UK). That’s probably therefore a good period to assess the opening six weeks of the year which, although blighted by significant levels of uncertainty (the markets nemesis), haven’t seen anything particularly fall out of bed.

That is, we have record stock levels in the US and very healthy gains in Europe. Government bond markets sold off in January but have recouped a fair amount of the losses thereafter. FX has been volatile but markets seem to be pulling the dollar in both directions and it has failed to lurch in any direction with any gusto. Credit has traded sideways of late with returns a small negative (IG-euro, IG-sterling) but up some +1% for the outperforming HY market.

We’ve manoeuvred Trump’s opening gambits, the UK Parliament’s Article 50 Brexit trigger is nigh and there’s “stuff” going on around the French elections that promises further edgy sessions through March and April. The economic data at least has been consistently good, with inflation on the up although we could do with the core level showing more signs of life while economic growth looks a little more solid and on a sustainable uptick.

Borrowers will be playing a game of “stick or twist” throughout March. They will assess whether the opening of a window to print ahead of the French elections is an opportunity too good to miss, or to just wait because Macron or Fillon (the likely second-round contenders) will see off Le Pen and the potential for a subsequent market sell-off.

Corporate bond market investors will sit tight and play it out just as they have been these past weeks of the new year. Unfortunately, that means quiet primary and a good bid for most things primary.


Primary delivers €1.55bn

Investment grade non-financial corporate issuance came with €1.2bn from McKesson and €350m from Securitas. McKesson’s 4-year and 8-year deals were priced 15bp inside the initial guidance while the group also added £450m in a 12-year transaction. Securitas also improved pricing by 15bp in its 7-year offering to get us off to a decent start for the week. There wasn’t anything else.

The deals took us to €5.1bn for the month so far – which is well below the average for a February, and for a month which usually only has to contend with the earnings season blackout period. This time around there’s a little more to think about (see above).


ECB still massively in the hunt

The ECB announced that it had purchased €1,944m of non-financial IG debt last week (see chart, below), taking their total purchases to date (after 36 weeks) to €62,924m.

Recent ECB weekly purchases

That’s 10% of the eligible market and implies an average weekly hoard of €1,747m of IG non-financial euro corporate debt since they began operations. Roughly 14% of the purchases have been in primary.

The average of the past six weeks, though, has been a mightily impressive €2.15bn, but we are still non-the-wiser as to why corporate bond spreads have failed to move tighter during this period (in 2017). In fact, they are a couple of basis points wider as measured by the Markit iBoxx index.

A consistent buyer of this amount of debt – with most of it in secondary, ought to have assured a ratchet tighter in spreads. The only dynamic that we can suggest to prevent this would be that there have been significant sellers into this ECB bid. That’s not necessarily always been the case.


Lack of news helps risk assets

The DAX led the way for stocks

With little on the news flow front in the session, there was excuse aplenty for markets to feel a little upbeat. Stocks were on the front foot from the off and unto 1% higher (DAX in the lead), while we had the classic weakness in safe-haven risk to offset that.

Gilt yields were up by 4bp in the 10-year to 1.30%, while the equivalent Bund yield was up at 0.34% (+2bp) although we saw modest recovery in peripheral yields as Bonos and BTPs price edged higher. The Bund/OAT spread was down at 68bp.

In credit, the market moved more in line with the improved tone overall. Basically, we edged a little better. The Markit iBoxx cash index for IG risk was lower at B+136.25bp while the HY index moved 2.5bp lower to B+377.35bp. For the indices, Main was a little better at 73bp (-1bp), but X-Over was up at 295bp (+4bp).

Have a good day.

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.