31st October 2017

We can never get enough

MARKET CLOSE:
iTraxx Main

50.0bp, -0.6bp

iTraxx X-Over

225.2bp, -3bp

10 Yr Bund

0.37%, unchanged

iBoxx Corp IG

B+97.7bp, -1.5bp

iBoxx Corp HY

B+259.2bp, -2.5bp

10 Yr US T-Bond

2.37%, unchanged

FTSE 100

,
DAX

,
S&P 500

,

And we can go on…

IG credit for the year to date has returned a superlative 2.8% with returns accelerating over the past two months as rate markets blink and credit spreads tighten into a brightening and anticipatory macro environment. The hunt for yield, buying the kind of risk we think is going to be ‘just fine’ into the financial markets recovery – and which allows us to take advantage of the cheap deals on offer – has made sure that the contingent convertible market has been the year’s most successful area of the corporate bond market. CoCo index returns are at 17% year to date and many will have made 20% or more on their holdings, so far. High yield markets are up 6.6% in the year to end of October. We’re willing the year to end now! And don’t forget, spreads are in record territory for almost all corporate markets and just 5bp away (at B+99bp) for the IG market.

During the session, the economic data from the Eurozone suggested that the cautious tone being taken by the ECB is warranted. For example, we had some slippage in inflation with the core rate dropping from 1.1% to 0.9% but the third quarter’s GDP growth rate came in at 0.6% QoQ versus expectations of 0.5% (and is running at 2.5% YoY). The unemployment rate for the region also declined to below 9% for the first time since 2009, to 8.9%. The market reaction overall was muted, and we think that it was more about the FOMC and month-end portfolio tidying up issues than anything else.

What the data is now consistently showing is that the Eurozone economy (amongst others) is in Goldilocks territory still, but that things might be heating up a little. Inflation, or the lack of it, is the brake. So moving to a more hawkish rate policy is unlikely soon, meaning that the bid for risk assets has to remain intact and with that we are unlikely going to see rate market yields head for the move. That is what we are seeing now, with the Bund yield trading off a 0.3-handle while residing below a 0.5% yield area for most of this year. The going therefore is set to remain supportive for the corporate bond markets into year-end, and we don’t think there is going to be much of a change to strategies in the opening months of 2018.

The UK is another matter, as a perennially high inflation economy now finally has a more hawkish central bank which looks set to raise rates in order to contain rising inflation, even as growth slows. Again, we’re thinking baby steps here, too, given that the household debt bubble is on the brink of a major burst. That potential for a slow, measured and cautious rise in rates will also keep the bid for sterling corporate debt intact. Even sterling IG corporate (cash index) returns are up 0.5% in October, with spreads just a touch tighter, while for the year as a whole – and with a weaker, choppy Gilt market – returns are sitting at 3.3%.


But FOMC curtails activity

It is usually the case that when the FOMC starts its monthly deliberations, it has the effect of dampening market activity. It did just that as both equity and rate markets played out in tight ranges Tuesday’s session. We’re going to get two days of it because Wednesday’s session will likely play out like Tuesday’s did, before the Fed’s communique potentially sees a better session for activity come Thursday. Friday will be a ‘nothing’ session again as we await a potentially blockbuster, corrective massive non-farm payrolls number.

In the final session of the month, equities barely budged in Europe although most bourses were just in the black. Rate markets were similarly left unchanged with the 10-year Bund left unchanged to yield 0.37% (around 10bp lower in the month) and US Treasuries in the same maturity were at 2.37% (essentially unchanged in the month). Spanish debt continued to rally as the worst case scenario in the Catalan face-off looks like it has been avoided. The 10-year Bono yield was down at 1.46% (-4bp) and off the 1.74% early October month’s high. Italian debt has done better, rallying off an early October high of 2.22% to 1.83% now. Small wonder Eurozone rate markets have had a good month (+0.8% returns)!

None of that stopped the US markets from powering higher and we saw records set again in the Dow and Nasdaq indices (intraday or otherwise).


Primary quiet, secondary sets new records (what else?)

Primary delivered zero in euro-denominated corporates, with the sole borrower being the Boston-based group Iron Mountain taking £400m from the sterling high yield market.

So, after a strange month in primary, we have a record month and year for high yield issuance at €13.65bn and €61.8bn, respectively. The bulging pipeline will see us over €65bn which would be a remarkable feat given that the previous record was €57bn in 2014.

There ought to be no ‘wall of funding’ crisis for the high yield market for several years which in itself will help keep the default rate at low levels and, as such, help retain the current investor confidence in the HY market.

The IG markets disappointed in our view with just €18bn on non-financial supply and a running total for the year of €228bn. We’re going to need €25bn+ in November to get us to close to the average of the previous four years. It could happen, but it is difficult to get any real colour on it, especially as the European earnings season kicks into gear from now, and there are plenty of excuses to stay sidelined and wait until the new year. IG senior bank debt stumped up a paltry €8bn and a disappointing €123bn for the year the end of October.

Anyway, in the market, the iTraxx indices continued to suggest confidence in corporate bond risk, the iTraxx Main index 0.6bp lower at 50.0bp and X-Over outperforming, lower at 225.2bp (-3bp). That followed through into the cash market, where liquidity is at such a premium, that any demand is now seeing a serious squeeze in spreads. The Markit iBoxx IG cash market index was tighter at B+97.7bp and just 3bp off the index record low! IG spreads, measured by this index, have tightened 9bp in October and 37bp this year. The CoCo index squeezed by 17bp to a new record low spread level of B+363bp while the index yield also crunched lower to 3.26% – also an index record!

Suffice it to say, the high yield market was also squeezing with the index recording a fresh historic low, of B+259.2bp (-2.5bp).

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.