9th March 2017

UK budget stifles activity

FTSE 100
7,335, -4
11,967, +1
S&P 500
2,363, -5
iTraxx Main
72bp, +1bp
iTraxx X-Over Index
285bp, +4bp
10 Yr Bund
0.37%, +5bp
iBoxx Corp Index
B+132.8bp, -0.5bp 
iBoxx Corp HY Index
B+364bp, -0.75bp
10 Yr US T-Bond
2.56%, +5bp

Putting one’s feet up

The UK budget closed the market! Who would have thought that? After the plethora of new corporate bond deals already this week, we might have expected more in yesterday’s session ahead of the more important ECB meeting and then the crucial (maybe?) non-farm payroll report come Friday.

Instead, we got a sub-benchmark sized IG non-financial issue and a Tier 2 deal to keep us occupied. The session was fairly mixed and moderately risk-on, with equities playing out in a small range. We did see government bond markets weaker though, pushing yields considerably higher. The movements around cash credit and the synthetic indices were noise in the grand scheme of things, and we suspect little will emerge for the rest of this week in terms of a meaningful directional push.

So just over a week into the month, fixed income returns are down and leaving us needing a decent rally in government bond markets to redress the balance. Credit markets have fared well, but are succumbing to the weakness in the underlying, given that tightening spreads are too small in movement to make too much of an offset difference to higher yields.

As we have stated on many occasions, the ECB average weekly lift of €1.75bn of IG non-financial corporate debt hasn’t really helped in seeing valuations ratchet tighter – as we ought to have reasonably expected. It’s not as if institutional outflows have been significant enough to feed the central bank beast.

We find that an explanation for the lack of movement eludes us. There is massive demand for corporate bond risk as evidenced by the clamour for bonds being offered through the new issue market. It can’t be – nor is it – that all the secondary market activity is being undertaken by the ECB while investors are parked at the “primary market gate”.

In any other period in the market, the ECB’s interest in the corporate bond market – where they have lifted almost €70bn of corporate debt in 38 weeks (around 10% of the eligible market) – would have seen spreads ratchet tighter. Since the beginning of 2017, spreads as measured by the broad Markit iBoxx IG index have moved just a 1.5bp tighter.

Primary markets effectively closed

Sole IG borrower: Elisa Corporation

The triple-B rated Elisa Corporation was the sole borrower in the session in the IG non-financial market with a €300m 7-year deal at midswaps+53bp and 12bp inside the initial price guidance.

As for today, there’s little reason to expect that much will emerge given that it’s the ECB’s day and usually the markets have excuse enough to stay sidelined while we await Draghi et al later in the session.

So, the total for the month has risen modestly after that Elisa deal to €7.95bn for the month so far. Should we get nothing or slim pickings for the rest of this week, we have a clear run through the next couple of weeks to get a decent level of deals on the screens – political event risk permitting.

The other deal of note came from UBI Banca which came with a 10.5NC5.5 Tier 2 structure for €500m, uncontested by any other borrower – we would say this was perfect timing.

UK budget passes, credit tighter

That the markets were left underwhelmed on the back of the UK budget was clear, but there was something to think about in rate markets. The 10-year Gilt yield rose to 1.22% (+3bp), the equivalent maturity Bund to 0.37% (+5bp) while OATs underperformed initially as yields rose 7bp to 1.03bp before they closed at 1.01% (and the Bund/OAT spread left at 64bp).

The 10-year US Treasury yield backed up to 2.56% (+5bp) as potential rate hike jitters started to infiltrate the mindset on the back of the massive ADP private sector jobs report.

In the corporate bond market, cash markets had another good session with spreads tighter for choice. The cash index was marked tighter, at B+132.8bp (-0.5bp) as measured by the Markit iBoxx IG corporate index. As suggested above, the cash credit market is returning -0.6% for this month and the index yield is up at 1.23% – some 12bp higher versus the level at the beginning of March.

In sterling, spreads edged a little tighter, but index yields also rose on Gilt weakness, leaving returns for the month so far at -0.45%.

As for the high yield market, it was a touch better bid too and spreads (as measured by the iBoxx index) were at B+364bp, although the index yield popped a little higher to 3.36% (+5bp) with weakness in the underlying at the front end of the curve. At least returns are in the black – just – at +0.1% for the month so far as the asset class continues to outperform versus other fixed income asset classes in Europe.

The iTraxx indices closed at 72bp (+1bp) and 285bp (+4bp) for Main and X-Over, respectively.

On a housekeeping note, we’ve added a new section to the website recording fund managers’ performance, tracking the performance of funds across the IG and HY asset classes in euro and sterling.

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.