- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 ,||DAX ,||S&P 500 ,|
This can’t be as good as it gets…
Q1 2018 is promising to win the prize for being just about the dullest of opening quarters in recent memory for the corporate bond market. We should quite rightly have expected something much better. After all, the fundamentals and technicals for the market are extremely supportive. Admittedly, we have had some severe levels of equity market volatility and a potentially serious rate market unwind, but the corporate bond market sits somewhere in the middle and has avoided the worst of it.
By doing so, we are sitting through just about the most tedious opening quarter in memory for the credit market. That is, credit spreads moved tighter initially, then a little wider since February. Secondary market liquidity is extremely poor, with only the ECB really lifting risk in secondary (circa €5-6bn per month).
Primary is busted and doesn’t threaten to break out of its current ‘walking dead’-like zombie state.
Credit spreads have previously been massively impacted by equity market volatility (Q1 2016, for example), but not this time. There’s been an eerie calmness about valuations, investor intentions and much pragmatism. Could it be that we’ve finally realised that the event risks affecting equities do not really hold for credit; or that the rate market unwind was necessary and expected, but cash is still expensive in Europe?
Whatever, it has not been exciting. The market feels commoditised, we’re buy-and-hold and it is going to take something special for any large-scale exit from the market. Few are looking at the exit.
As for primary, it’s about as poor as it has ever been. How can anyone be comfortable with just €32bn of IG non-financial issuance so far this year? Just to put that into perspective, the first quarter of 2016 delivered €73bn of deals, 2017 some €87bn and in Q1 2015, we had €105bn of issuance.
If we go back to 2009, we had over €130bn of IG non-financial issuance. The high yield market is more erratic, but we have had €9.5bn of issuance so far in this quarter and that’s quite reasonable, while the same can be said for the senior bank debt market (at an above average €37bn).
We suggested in a comment last week that the ECB has failed in its stated mission to get the primary markets to take much more of the corporate funding burden, away from the banking sector (so-called disintermediation). The amount of issuance we have had since the ECB got involved with its QE-induced skewing and manipulation of the bond market has failed to noticeably rise.
The level of supply has not increased outside the average of the last five years in any market, save perhaps for the high yield market in 2017, but history will probably show that it was just a blip. We might, of course, be wrong and either March from next week – certainly not this week (ECB/non-farms/import tariff uncertainty), or Q2 will deliver the kind of supply needed to get the hoards of sidelined cash invested. Short memories and all that, the markets will just move on and be grateful for the issuance.
And then there is performance. Deals are doing ‘ok’ on the break in primary. They are not all going tighter as a matter of course as they might have done in periods last year, because these newer ‘more liquid’ issues are more impacted by macro uncertainty and any resulting volatility – of which we have had a fair amount of.
However, overall, IG and HY credit (Markit iBoxx) have returned just -0.3%, on spreads 3bp and 30bp wider YTD, respectively. That’s fairly safe! After all, equity performance has been worse in Europe, although equities have the advantage of moving sharply higher in double-quick time, while spread tightening tends to be far more laborious.
What’s needed? A more effusive, elaborate and heavier level of primary market activity. The demand is there and at the moment, so are the frustrations.
North Korea and Republican backlash boost markets
There was plenty to be cheerful about in Tuesday’s session. North Korea’s offer to “de-nuclearise” in return for guaranteed protection for the current regime initially served to boost the markets with news of a North/South summit in April. And in a flash, a major geopolitical worry was potentially removed from sight.
And then we had the US Republican party’s growing backlash against Trump which saw senior figures come out in opposition of the steel import tariffs. Hopes here that Trump would back off from imposing those import tariffs due this week, although the initial signs were that he was unwilling to do so.
So it was a “good news” day. The markets didn’t quite lap it up, but they gave us a decent recovery session in Europe, with the promise no doubt of more to follow. Even Italian stocks recovered their previous day’s losses and some more as they rose by almost 2%. European stocks were generally higher by up to 0.5% with the US markets dipping in and out of the black.
Rate markets saw US yields drop a touch early on, but then revert to unchanged with the 10-year at 2.88%, but European government bond yields moved higher, the 10-year Bund up at 0.67% (+3bp) and the Gilt at 1.52% (+2bp). BTPs were a basis point lower in yield, at 2.08% for the 10-year.
Primary improves, but needs to do much better
The senior banking sector was again active with issuance totalling €2.5bn in the session from three borrowers. Credit Agricole lifted €1bn in a senior non-preferred deal priced at midswaps+62bp off book just over €2bn subscribed (-13bp versus IPT) in a 7-year maturity. Next up was SEB which took 5-year funding also for €1bn at midswaps+12bp (8bp inside IPT) with books at around €2bn. Finally, Sparebanken 1 Oestlandet was in for €500m in 5-year funding priced at midswaps+45bp.
We had more from the REIT sector, this time Belgium-based Befimmo issued €125m in an eight year deal, priced at midswaps+120bp. In high yield, Austrian group, Egger Holzwerkstoffe priced €150m in a PNC5 hybrid format to yield 5%. This was followed by US electronics group Belden issuing a 10NC5 senior subordinated €350m transaction, priced to yield 3.875%.
In IG non-financials, it was the turn of Danish shipping group, AP Moller-Maersk, which came in for €750m of 8-year funding priced at midswaps+90bp, which was 10bp inside the opening mumble, off a book at just over €1.25bn. So with this deal, just the fourth IG non-financial offering this month so far, the tally for the month is up at €2.35bn and we don’t expect too much more this week, given the ECB is up on Thursday and we non-farms on Friday.
The iTraxx indices better offered (lower), reflecting the risk-on tone, with Main closing at 52.3bp (-1.9bp) and X-Over lower at 261.5bp (-8.5bp).
In cash, we had some respite from the previous sessions’ weakness. And that meant the iBoxx index was marked better, leaving it at B+93bp (-1.3bp) as was the CoCo market, the index there left at B+333bp (-10bp). Finally, the high yield market played ball and prices edged higher for choice, leaving the index, marked at B+310bp (-7bp).
Have a good day.
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