18th November 2018

You ain’t seen nothing yet

iTraxx Main

77.4bp, +1.3bp

iTraxx X-Over

316.0bp, +1.8bp

🇩🇪 10 Yr Bund

0.37%, unchanged 

iBoxx Corp IG

B+156.6bp, +3.2bp

iBoxx Corp HY

B+468bp, +11bp

🇺🇸 10 Yr US T-Bond

3.06%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

It isn’t all that it seems…

The big deal was the Brexit agreement and the subsequent revolt from (almost) all sides of the political divide. The political reaction soured sentiment across the sterling credit market as we might have expected, but we also had a contagion impact on euro credit markets too. The end game might just be a ‘no-deal’ and the disruption which follows will be significant, unless (in our view) the EU side acquiesces and takes a more reasonable stance. For investors, the end of the year can’t come quickly enough and caution is going to be the name of the game from now until then.

In addition, Mario Draghi was seemingly unmoved in his view that the Eurozone is only experiencing a soft patch. It’s just that when they decide/realise it is not a soft patch, it will be too late. QE ends in a few weeks, and the Eurozone’s (budget) recalcitrants will be left to fend for themselves. Anyone looking for a quick turnaround in growth (Germany contracted in Q3 versus Q2) is going to need to believe that trade talks, Brexit and the general malaise current impacting macro all draw to a swift and positive conclusion forthwith. Don’t position for it.

A vote of no confidence in May’s premiership is a nailed-on certainty, we think. That possibility left us to limp to the finish line for last week, with the markets licking their wounds and ensuring that we saw out the final session with little activity but in defensive mode. This week likely sees that confidence vote and comes ahead of the November 25 gathering where the EU’s 27 other leaders are expected to ratify the Brexit agreement. However, preceding it, there’s enough uncertainty in the air that we likely trudge through next week, and be on the defensive for choice. Thursday’s Thanksgiving/Black Friday will also bring proceedings to an early and premature end for the week.

We’re not sure we can cram too much in between Monday and Wednesday. There will be primary activity should event risk remain at bay, while US group Stryker Corp’s expected multi-tranche issue will proceed whatever – unless the bottom literally falls out of the market. US entities are a resilient bunch. Other borrowers will likely wait, in our view.

We’ve had some big moves in spread markets. Of late, it’s been UK banks (especially and Brexit exposed entities) which have been hit particularly hard and any recovery in prices is likely going to be laboured given that the odds are stacked in favour of the UK parliament rejecting the agreement. In fact, however, we look at it – the risk is to the downside. Stay away.

For sure, there is unlikely going to be any sterling corporate bond issuance until the fog clears. Parliament votes on the deal in December, which means sterling corporate primary is likely to offer very little until 2019 now.

Credit coming unstuck

After a relatively good year, we’re beginning to see an unwind in performance now. We’re back at June 2016 levels, and pre-QE ones at that, as it happens. That’s just coincidence. The weakness in spread comes against a backdrop of escalating political concerns in Europe, weak macro, but also poor liquidity which is resulting in a defensive bid and exacerbates the weakness. Investors are not necessarily shying away from the product, though. After all, they’re still funding corporates and we’re seeing size get done (albeit cheaply).

Anyway, secondary came under pressure across the market which saw the IG iBoxx index 3.2bp wider following one of the biggest daily moves this year on Thursday (+5bp). At B+156.6bp, the index was 15bp wider in the week! It is 60bp wider this year now and 11bp wider this month. Total returns are starting to give up some ground too, with IG now down 1.3% for the year having previously comfortably held below -1%. It’s still much better than equities on this measure, but that’s only little consolation for this illiquid asset class.

In high yield, the index was 11bp wider on Friday or 44bp in the week, and left at B+468bp at the close. Big moves. Total returns for the high yield market, nestled at or just below the -1% level for much of the year, are now at -2.3% year to date.

As for sterling, banks (in particular) came under pressure, and the sterling index moved 3bp wider on last week’s final session to G+181bp, which was also 15bp wider for the week. So, in line with the euro market in terms of the broad move. However, the bid for Gilts managed to reduce the pressure on total returns, which are now at -2.75% for the year so far.

We wouldn’t look for a material snap back in any of these markets now through to year-end. Secondary activity will stay extremely light. The action, if there is any, is going to be in primary, but we’re also in wind down mode here.

Edgy markets

Last week’s deals in IG non-financials took the monthly total to €21bn and the YTD total to €210bn. Takeda is responsible for €7.5bn this month, VW €4.25bn with Allergan (€1.7bn), BMW (€1.75bn) and Logicor (1.8bn) being the other major borrowers in November. Another €10bn of issuance between now and say the end of the first week of December is possible – and we think likely, which would close us out at around the €220bn area for the full year. That would be well down on the average of the 2014 – 2017 period which saw annual averages in excess of €250bn.

Elsewhere, stock markets had a choppy session in the US but managed, in the end, to close a shade in the black while in Europe we closed in the red by up to 0.3%. Rates were largely unchanged leaving 10-year Bund yields at 0.37%, Gilts at 1.40% and the Treasury at 3.06% (-2bp). iTraxx Main edged up to 77.4bp (+1.3bp) and X-Over was up at 316bp (+1.8bp). Cash clearly underperformed.

So for this week, Thanksgiving and Black Friday close us out early, but the focus will be on the Brexit situation and we might get some developments around the potential for a revised Italian budget.

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.