28th September 2017

A messed-up September

iTraxx Main

57.8bp, +0.3bp

iTraxx X-Over

255.3bp, +0.9bp

10 Yr Bund

0.48%, +1bp

iBoxx Corp IG

B+107.3bp, +0.1bp

iBoxx Corp HY

B+281.5bp, -1bp

10 Yr US T-Bond

2.31%, unchanged

FTSE 100

7,332, +9


12,705, +47

S&P 500

2,510, +3

Some good, some bad and a bit of ugly…

The final session of the month leaves us to reflect, inevitably, on September’s performance. There’s still a session to go, but fixed income has had a torrid month because rate markets have sold off hard in the final week of it. The performance varies widely across the different asset groups within the fixed income markets, but also between different equity markets. In the credit markets, spreads have held up quite well, no doubt helped by the better economic news flow, and lower levels of supply than we might have expected this month, but returns have taken a hit in many instances. Investment grade spreads have tightened 6bp this month so far, as measured by the Markit iBoxx index, but total returns are recording a loss of 0.2% in September – and it will worsen a little more after Thursday’s small weakness in rate markets.

For sterling IG, September is worse. The massive back-up in Gilt markets earlier this month leaves sterling IG showing returns of -2% on index spreads tighter by 1.5bp – and the index yield higher by 25bp. The sterling market is the longest duration market of the IG classes, hence the severe hit to total returns.

On the bright side, the shorter duration and higher spread high yield market has come through relatively unscathed. The iBoxx cash index is 17bp tighter in spread terms in September so far, while the index yield has actually dropped 9bp and returns are up 0.5%. Protection against moderately rising rates in high yield? Yes. Most of the inflows into credit have found their way to IG funds. That performance for September for high yield won’t be a bad thing for the high yield markets. At worst it keeps outflows to a minimum (some might fret about higher rates) and at best, it might elicit some inflows (as is usually the case when high yield performance is so good).

And the story is as mixed in equities. The US equity markets have recorded many closing-day record highs in September, but are only up 1.1% (S&P), while after a poor August, some catch up and recovery dynamics – along with a weaker euro versus the dollar, have all combined to help the DAX (for instance) move over 5% higher with a session to go for September. Trump’s tax reform pledge (corporation tax to 20% from 35% etc) was getting much focus and might provide a catalyst for a continuation of the daily record trend being set for US equities through Q4.

That’s a real hotchpotch of performance for – and within – the different asset classes, where the prospect of a solidifying Eurozone recovery and higher borrowing costs to come in the US have seen rate and currency movements make a big technical impact on the markets.

Primary slows into month-end

Independent grid operator Fluxys Belgium SA/NV was the only non-financial borrower in Thursday’s session. They raised €300m in a 10-year deal and a mere €50m in a 15-year maturity, managing to reduce the initial price talk for both trenches by 15bp, to fund at midswaps+90bp and +110bp, respectively.

Other deals came from Volksbank Wien for €400m in a subordinated 10NC5 Tier 2 structure priced at midswaps+255bp, while Bank of Nova Scotia took €750m in a 5-year floater.

In sterling, Northumbrian Water lifted £300m in a 10-year maturity at Gilts+98bp, while Investec wasn’t deterred by the weaker reception to Wednesday’s ABN AT1 deal by plumping for £250m in a PNC12/2024 AT1 deal priced to yield 6.75%.

We can expect a deal or so in today’s final session, especially in high yield. All we have had so far this week has been the €85m from Suominen Corp and €250m printed by Almaviva in a 5NC2 deal paying 7.25%. It’s been a good month, though, with €8.8bn of high yield debt issued, while the IG non-financial market has fallen short of our expectations, at €26.1bn of deal prints. Senior financials prints have totalled a decent €13.5bn so far this month and we’ve had several CoCo offerings.

Penultimate session mixed for risk assets

Getting it into law might take a while, if he can manage it, but Trump’s potential tax reforms are a useful distraction from the other issues which surround him, particularly on the geopolitical front. The markets, however, ought to like the rather broad, general, opening salvos and the intent. Not that we saw that in Thursday’s session. US GDP for the second quarter came in at a revised higher 3.1% versus previous indications of 2.6%. There was a tired feel to the markets, though.

In rate markets, yields continued to rise. Small mercies that they closed off their session tights. The 10-year Bund yield saw 0.50%, before settling at 0.48% (+1bp), the equivalent US Treasury was up at a yield of 2.33% (+2bp) before it settled unchanged, and the 10-year Gilt yield resided at 1.38% (unchanged). That will further eat into returns for fixed income markets once the final marks go in after today’s session.

As for credit, the synthetic indices were a little defensive with iTraxx Main up at 57.8bp (+0.3bp) and X-Over at 255.3bp (+0.9bp). In cash, the Markit iBoxx IG corporate bond index closed at B+107.3bp which was effectively unchanged in the session. The high yield market was a touch better bid and the index level dropped to B+281.5bp (-1bp).

We will be back on Monday with all the month and year-to-date performance and issuance statistics.

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.