- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
|🇬🇧 FTSE 100 ,||🇩🇪 DAX ,||🇺🇸 S&P 500 ,|
Time to move on…
It’s back to business. We’ve had our fill of geo(politics). The FOMC and ECB meetings loomed large in Wednesday’s session, the latter having much to contemplate given the recent weakness in the economic data in the Eurozone – which is looking like we’re not heading for a short, soft patch but could be looking at something more sinister. April’s Eurozone industrial production dropped by 0.9% versus March, against expectations of a 0.5% fall. The FOMC raised rates by 25bp as expected, but the ECB’s press conference on Thursday is going to be all the more interesting.
Our view is that the ECB will leave everything unchanged even if they might be champing at the bit to reduce some of the accommodation. The opening skirmishes of the trade war could lead to something altogether more profound and the central bank will need to make sure its policy reflects a significant worsening in it.
It is quite clear that Trump is flexing the US’ economic muscles and looking for a fight. He will be emboldened by the perceived success of his love-in with Kim Jong-Un. So the deposit rate should stay at -0.4% and QE will remain at €30bn per month for now. We might get more colour on the next step of their tapering move in the 26 July meeting, but a summer of macro-discontent would leave us looking for news come the 13 September gathering.
What does all that mean for the credit market? Very little in reality. We’ve backed up in spread terms this year in IG by 30bp as measured by the iBoxx index – which has come against our expectations. We don’t believe they will go much wider from here as the Goldilocks-like economic trajectory ought to play into the hands of the corporate bond market.
For borrowers, funding costs have risen off the historic lows but after a decade almost of funding at or close to those historic levels a relatively small increase isn’t going to rattle any corporate treasury funding desk. The deal flow isn’t exactly suggestive of borrowers desperate to get more funding in case costs rise sharply. That’s unlikely to happen.
As a reminder, IG issuance is running at its slowest pace since the Eurozone’s crisis-ravaged 2012 period. That’s saying something given that we’re hardly in crisis mood. We would think that the market has just run out of steam. In the 5-year period from 2013 to end 2017, IG non-financial issuance has exceeded €1.1trn much of which would have been used to finance redemptions with a fair amount just a simple hoarding of cheap funding while the going was good. Actually, that going is still good.
Primary still awaits Bayer’s deal
While we waited for the blockbuster price-taking deal from Bayer, the market had to be content with just the slimmest of pickings. Well, there was just the sole deal from Schneider Electric which issued €750m in a 9-year maturity at midswaps+60bp. The borrower had the complete attention of the market and garnered an order book of €3.7bn, managing to reduce the final pricing by 20bp versus the initial guidance and offering a final new issue premium of around 7bp versus the curve. Not bad.
Dutch insurer VIVAT NV was the other borrower of note, taking PNC7 solvency II RT1 funding at a yield of 7% for €300m on books of €450m.
In the all-important IG non-financial market, we have had just €6bn of deals so far this month from just eight borrowers and ten tranches. There’s up to €20bn being mooted by Bayer, and even AT&T might be in the market in due course after its deal with Time Warner was finally agreed. But that’s not taking away from the fact that issuance in this first half of the year has been very poor at €101bn.
FOMC curtails activity
US producer prices rose by 0.5% in May versus expectations of 0.3%, taking the headline rate to 3.1% and the core rate to 2.4% – also ahead of expectations. With wage data and non-farms before it along with a whole host of other upbeat domestic indicators supporting a growing economy, the Fed’s 25bp rate hike came as no surprise.
The rate curve didn’t really budge, 2s/10s in the US at 40-41bp and still the flattest level it has been since before the financial crisis in 2007. The 10-year was unchanged to yield 2.95% until the rate decision and then moved to 3.00%, and the 2-year yield rose a 4bp to 2.59% (at the time of writing).
Earlier in Europe, the Bund yield declined to 0.48% (-1bp), BTPs were yielding 2.82- % (-5bp) and Gilts were left to yield 1.36% (-4bp, all in the 10-year). The Eurozone’s poor production data for April will have seen to the support for government bonds.
Equities lived through another fairly subdued session, up eventually by up to 0.4% in Europe. The story, though, was in the US and the tech sector with the Nasdaq hitting fresh all-time intraday highs during the session. The rest of the market was more subdued into the Fed decision which saw the expected hike and then news of two more to follow this year. That was something the market had been anticipating of late, with four hikes now pencilled in instead of three.
Synthetic credit closed the session with protection costs showing a sharp reversal versus the previous day. Main was 3.1bp lower at the end of the day at 69.0bp and X-Over dropped 7.7bp to 298.6bp.
That followed through in the cash market which also reflected a generally better tone. We squeezed a little better again cash, to leave the IG iBoxx index at B+126.8bp (-0.6bp) which is the lowest level for over a week! There’s some life in the market yet, just. As for high yield, the market was effectively unchanged, the index left at B+375.5bp (-0.6bp).
Have a good day.
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