21st September 2017

It’s a funny old world

iTraxx Main

57.2bp, unchanged

iTraxx X-Over

254.3bp, -2.3bp

10 Yr Bund

0.45%, +1bp

iBoxx Corp IG

B+107bp, -0.2bp

iBoxx Corp HY

B+282.6bp, -1bp

10 Yr US T-Bond

2.27%, unchanged

FTSE 100

7,262, -10


12,600, +31

S&P 500

2,501, -8

Easy does it…

It’s all tickety-boo, with the Fed out now of the way leaving us to focus on the final few sessions of this month and the next few weeks, into the late October ECB meeting where the markets will choose to be nervous again as they look for news on the ECB’s QE asset tapering schedule.

The Fed follows shortly after but here the markets anticipate little or no policy change. However, they probably will feel the need to fret again into the December central bank policy meetings. It ought never had to have been a nervous September. Because it feels like there was, and is, a high level of apprehension in the markets. As we suggested in Thursday’s comment, we’re not there yet.

That recoil will come when the pulling of the liquidity plug leaves us naked as to realising how long investors are in just about every risk asset class. Or we get a catastrophic event which leaves the global financial system as vulnerable as it was back in  2007/8. The latter is almost impossible to time, and therefore position for, given that we have had many opportunities to have expected several recent events to have got us close to a level of vulnerability that any pullback would be sustained.

It hasn’t happened that way.

Why? Again, as we have suggested several times in this note previously, global liquidity has been propping up and inflating all manner of risk asset bubbles. And stating the obvious: policy makers know it. Hence the careful communication of intentions to the markets, and the extremely slow tightening in policy. The global debt burden is so massive that the financial system is as fragile as it have ever been. That excess liquidity has been the single factor in sustaining the debt burden (easing refinancing debt servicing risks for governments, corporates and consumers). So let’s get on with it, we can keep going for a while yet.

It seems like only the US stock markets are plugged into a bullish mindset as they set records on what is now a daily basis, pretty much. As those markets eke out small incremental gains, the rest of us look on, nervously. Stocks in Europe are not following as we might have expected, while rate markets have their own issues.

They’re caught in the headlights of an improving growth dynamic in the Eurozone (but stubbornly low inflation), rising inflation in the UK (but nervously weak levels of growth), and revised higher levels of growth in the US but still below-trend levels of inflation. And all the while, there is one eye on event risk which sustains a safe-haven bid and prevents yields moving materially higher.

The corporate bond market in the meantime shrugs off the uncertainty elsewhere, but isn’t going gangbusters as we might have thought it would. Admittedly we haven’t been at these tight levels for this length of time before, but it makes sense that we reside here. the EB QE had manipulated and distorted the market.

Central bank policy since the crisis has made sure that the default rate has been non-existent (2% or less). Low yields in government bond markets have thus made our market more attractive. In a sense, corporate bonds are as safe-haven an asset as some government bond risk. And any fear aside, there’s greed.

Primary still knocking them out

€250m deal for Finnish paper and pulp company Metsä Board Oyj

We got our first high yield priced deals of the week. First off was the unrated Eramet which printed €500m in a long 6-year deal priced to yield 4.2%. High double-B rated Metsä Board Oyj followed with a 10-year deal for €250m priced at midswaps+190bp (4x subscribed). Finally, Ovako took €310m at 5% in a 5-year.

So that’s a very good €7.4bn for the month thus far, with several deals still to get done (Stada upsized to over €1bn and to be priced Friday, for example), leaving us still looking at close to €10bn in supply for September.

In the investment grade market, the non-financial corporate sector was represented by Portugal’s Nortegas Energia which came with a dual tranche 5- and 10-year maturity offering. The 5-year was priced at midswaps+68bp and the 10-year at midswaps+118bp – both 17bp inside the initial guidance. The group raised a combined €1.3bn for their troubles on books which were 3.5-5x subscribed. In all, €21.3bn has been printed in IG non-financials for the month so far.

For senior financials, Goldman Sachs took €2.25bn in a 6NC5 floater and Bank of Montreal made a rare foray with a 4-year FRN for €1bn. Dutch bank de Volksbank piped up for €500m in a 3-year fixed deal. The €3.75bn in the session takes the monthly total for senior financial issuance to €11.5bn.

Finally, in the sterling market, Gatwick Funding took £350m in a 22-year maturity senior secured transaction priced at G+123bp while Miller Homes priced a dual tranche combined £425m high yield deal.

Markets looking tired

In the markets, there was a tired feel. Equities were mixed with the FTSE flat, Eurozone bourses higher by up to 0.4% and US markets down a little, but we can’t complain about that for the US given the S&P and Dow have been setting record highs of late. That weary feeling was apparent in rate markets as well, which saw the Bund yield up a touch at 0.45% (+1bp) in the 10-year maturity, US Treasuries at 2.27% (unchanged) and Gilts yielding 1.37% (+3bp) – ahead of Theresa May’s big Brexit speech in Florence on Friday.

As for the credit markets, the first port of call for sentiment is usually the liquid risk proxies – and that means the synthetic iTraxx indices. Main was left essentially unchanged at 57.2bp while X-Over managed to move lower to close at 254.3bp (-2.3bp) as participants continued to rearrange positions into the new Series 28 contract.

The cash market was better bid for choice amid little activity and the iBoxx cash index closed at B+107bp. That’s 1.5bp tighter this week so far, and the trend over the past two weeks has been that laborious grind tighter. The sterling IG market actually did better and the index showed a tightening of 0.7bp to G+134.2bp.

High yield secondary was light (flow-wise) but we edged better and the Markit iBoxx index was tighter at B+282.6bp (-1bp) which is now 6bp tighter this week. That leaves us with 6bp of tightening to go before we reach record lows for this market/index. That’s probably next week’s business!

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.