15th January 2019

Voting for a renaissance

MARKET CLOSE:
iTraxx Main

80.7bp, -1.9bp

iTraxx X-Over

333.8bp, -8bp

🇩🇪 10 Yr Bund

0.20%, -3bp

iBoxx Corp IG

B+177.9bp, -0.9bp

iBoxx Corp HY

B+516.4bp, unchanged

🇺🇸 10 Yr US T-Bond

2.71%, unchanged

🇬🇧 FTSE 100 6090.04, (-1.55%) 🇩🇪 DAX 12901.34, (-0.71%) 🇺🇸 S&P 500 3372.85, (+0.12%)

Time to Juncker it…

All eyes were supposed to be on Westminster, but there was a more than a glance on German GDP data. They might have avoided a technical recession with Q4 GDP managing to record a positive result, but Germany did record the lowest GDP growth since 2013, as last year’s expansion came in at 1.5%. That’s down from 2.2% in 2017 and corroborates all the emerging data elsewhere pointing to difficult times ahead on the macro front.

What it might mean is that the EU will need to acquiesce to some of the UK’s demands (namely the Irish backstop) or a hard Brexit will plunge the whole region into even greater difficulty. The UK might not be able to afford much pain in the near term should we go out on WTO terms and a no-deal, but the EU can’t either. It’s time for the latter’s establishment to step-up.

Italy: Big deal

The big deal of the day was Italy’s March 2035 deal, which attracted a book exceeding €35bn for a whopping €10bn. They’re not the first this year (actually 6th), but they’re the biggest and the size of the demand for the deal will have heartened an Italian Treasury looking to raise somewhere in the region of €250bn this year (not all in the capital markets). The deal didn’t come unopposed, with several other SSA issuances in the session, but this was the main deal of the day.

Macro and Brexit dominated, though. News that the Chinese authorities had implemented stimulus measures in order to counter the slowdown (lowered VAT and provided tax rebates for various industries) gave markets a boost at the open. The Dax, for example, rose by almost 1% before fading most of the gains on release of the GDP data in a choppy session. Bunds yields fell a touch, the new 10-year down at a yield 0.20% (-3bp, +5bp roll versus the off the run), and the Brexit excitement (and nervousness) ahead of the vote had the 10-year Gilt yield lower at 1.25% (-4bp).


Corporate credit lost in it all

The corporate bond market took a back seat. We had zero on the plain vanilla primary front, but that was to be expected. Secondary was extremely quiet and better offered, for choice. In all, secondary has failed to gain any traction this year save for some gains – albeit moderate – in higher beta risk as investors look to add some AT1 risk which has deemed to be an attractive opportunity with yields of SIFI bank paper exceeding 7% – 8%. Seems fair enough a trade!

There is a bearish trade for IG risk, but we are seeing support for HY and higher beta financial assets. IG non-financial corporate valuation is deemed expensive given there is no ECB backstop bid/marginal buying with that institution seen to have artificially tightened spreads through its manipulative €172bn QE effort in the June 2016 – December 2018 period. In addition, there is much fear that secondary curves will continue to be aggressively repriced on the back of cheap primary offerings.

On the other hand, the higher yielding markets have actually outperformed. So, the IG iBoxx index is 5.6bp wider in the opening two weeks of this year against the backdrop of buoyant equity markets in the main. Total returns are flat as the underlying has managed a better bid. The more interesting AT1 market sees the index 35bp tighter and total returns exceed 1% already. The shorter duration high yield market has not been forgotten with spreads 9bp tighter (helped by generally better equities) with total returns at +0.8%.

Given the slowing in macro, the delayed and late response we will eventually get from central banks, the geopolitical risks while global system financial crisis remains far away (we hope), that credit market response all makes sense.


The stage is set

Weaker crude prices helped US producer price inflation decline by a more than expected 0.2% in December and adds to a growing line of US data pointing to a gradual slowdown and needing a dovish reaction from the Fed. Quarterly earnings from JP Morgan and Wells Fargo both missed and earnings declined as expected, just as Citigroup did before them in the previous session. More on that here.

We all knew that With PM May was likely going to get hammered in the Brexit vote, which weakened sterling and gave a boost to UK equities, allowing the FTSE to rise after earlier weakness (+0.6%). But the additional boost came from those US PPI numbers as investors were warmed by the prospect of a less aggressive Fed. US stocks were higher by 1%, as at the time of writing.

European credit closed out seeing the synthetic indices better offered (lower) and thereby reversing the previous session’s close, with the iTraxx Main index 1.9bp lower at 80.7bp and X-Over 8bp tighter at 333.8bp.

In cash, we edged a little better in a quite unspectacular session (too many those of late) and the iBoxx cash index was 0.9bp tighter at B+177.9bp. Into that slightly better tone, the high yield managed only to end better, the HY iBoxx index at B+516.4bp, but the AT1 market was noticeably better versus it (a touch anyway).

Have a good day.


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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.