31st January 2018

Yellen’s last call

MARKET CLOSE:
iTraxx Main

43.7bp, -0.6bp

iTraxx X-Over

238.1bp, -1.3bp

10 Yr Bund

0.69%, +1bp

iBoxx Corp IG

B+83.1bp, -0.5bp

iBoxx Corp HY

B+270bp, -1bp

10 Yr US T-Bond

2.73%, +1bp

FTSE 100 , DAX , S&P 500 ,

There’s nothing wrong with corporate credit…

The equity and rate markets are battling it out between them for their ‘death or glory’ moment, and they’re dominating the proceedings on the investment allocation front. But, slipping in between the cracks is the stellar performance in January for the corporate bond market. There are records being set in equities, and in the closing sessions of the month a little more volatility than what we might like or have been used to.

The doom-mongers are sharpening their pencils. Rate markets are reacting to the plethora of upbeat macro data points as the economic recovery looks to gather pace; yields are going higher even if policy is crawling towards a less accommodative stance.

And so for January, total returns across the fixed income space are negative with credit outperforming rates. Pretty much alone in exhibiting positive returns is the contingent convertible bond market. Still, spreads have tightened everywhere, and corporate credit has not exhibited any of the volatility which has afflicted the other aforementioned markets. We’re in good shape.

Supply could be better, but the fact that it has been relatively light has made for a major squeeze, in some sectors of the credit market. We think that more primary market issuance would be a positive, as deals getting taken down well and performing well on the break would inject a further level of confidence (as if it was needed).

Generally, we would think that the credit market’s numbers are actually quite good given the back up in rates, with the market supported by improving macro (fundamentals) and the ECB’s QE purchases of debt in an illiquid market. High yield spreads have tightened by 17bp (iBoxx index) but total returns for the month are zero.

IG has seen an excellent tightening in the index of 13bp but returns are -0.3% as the longer duration of this market is affected more by the sell-off in rates. As for the contingent convertible bond market, performance here has fallen back a little in the final few sessions of January, but it has still come up with 2% of total returns on spreads tightening 60bp (that was as much as 74bp for the index last week).

Elsewhere, Eurozone sovereigns have returned -0.4%. For stocks, they’re up by over 5% in the US even after the large falls on Tuesday. The Dax has also been positive and is up by around 2.5% for January. Bitcoin’s had a shocker though, down by over 25% in January!


Session reflects, pre-FOMC

Following a fairly hairy day on Tuesday, the market was more reflective on Wednesday. Equities didn’t move much up or down in Europe and failed to get any a leg up once the US opened up to 0.7% higher. They both faded those ‘better’ earlier levels. The FTSE was off 0.8%, the Dax 0.2% while US stocks were flattish (at the time of writing).

The news flow took in German unemployment where the rate fell to a fresh record low of 5.4% in January from 5.5% previously. For the Eurozone, the unemployment rate was unchanged at 8.7% and still at a 9-year low. The other good news (for risk markets), was the stubborn inflation situation, where the year on year rate fell to 1.3% while the core rate rose to 1.0% from 0.9% previously. That core rate is very closely watched and the ECB is targeting 2.0%. The ECB has every reason to stay dovish for a while.

The government bond market was barely changed at the start with perhaps even a better bid. But we closed with some pressure beginning to emerge with Bund yields up a touch at 0.69% (+1bp, 10-year) and US Treasury yields were 1bp higher in the same maturity at 2.73% – not really moving after the FOMC verdict (see below). In the UK, Gilts in the 10-year maturity closed with the yield up at 1.50% (+3bp).

In primary, we had a few deals. Nordea Bank issued €1bn of 4-year maturity floater priced at Euribor+13bp. So we close January with €21bn issued in the senior financial market which is a decent performance and just shy of last year’s monthly total.

We had just one non-financial IG borrower in the session, through Societa Iniziative Autostradali e Servizi SpA (Sias) which issued €550m in a 10-year at midswaps+70bp. That was 15bp inside the opening guidance with books at almost €2bn. It still leaves January with a much lower than expected €18.1bn issued.

Although a blank was also recorded in the primary HY market in the session (Scientific Games was due to price a 3-part €575m/$500m deal after the close, as was Albea for €150m), the €3bn for the month before that deal is still a good effort (and ahead of last year’s total, €2.36bn).

Other borrowers saw Poland join the growing list sovereign issuers this year, coming with a €1bn green bond issue priced at midswaps+23bp in an 8.5-year maturity. Italian state controlled ‘investment bank’ Cassa Depositi e Prestiti SpA took €750m in an 8-year deal and Wellcome Trust issued a sterling denominated (£750m) century bond at G+80bp (-20bp inside IPT) off a book exceeding £3bn.


Fed leaves it unchanged

Well, after all that, Fed Chair Yellen bowed out with the FOMC leaving it all unchanged. And so we go on to the late March meeting for the next meeting as we welcome a new Chairman. The FOMC held steady on rates as was largely expected but according to the committee a March rate rise is on the cards following strong gains in employment, household spending and business investment, with inflation expected to pick up as the year progresses.

In credit, iTraxx Main and X-Over have been trading in tight ranges and nothing changed in the session to alter that pattern. Main was a little lower at 43.7bp (-0.6bp) and X-Over was left at 238.1bp (-1.3bp).

For the cash market, there wasn’t much happening but the better tone in US equities into the afternoon session along with barely any issuance made for a better bid in IG secondary, and the Markit iBoxx index closed at a fresh record tight of B+83.1bp (-0.5bp). The high yield market closed a basis point tighter in the most lacklustre of sessions, the iBoxx index at B+270bp.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.