8th May 2019

All’s fair in love and war

iTraxx Main

62.5bp, +1bp

iTraxx X-Over

266.9bp, +0.9bp

🇩🇪 10 Yr Bund

-0.04%, unchanged

iBoxx Corp IG

B+128.4bp, +4bp

iBoxx Corp HY

B+425.5bp, +10bp

🇺🇸 10 Yr US T-Bond

2.47%, +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″]

Trump’s position of strength…

We can suppose that, as it stands, the markets are having one of those ‘we don’t know what to do’ moments. Trade negotiations are about to begin, but a positive outcome is far from certain as the Trump administration ramps up the pressure. And he was at it again with an accusatory tweet aimed at the Chinese and the Democrats. Trump is emboldened at the moment by the relative – and in some cases – surprising strength and resilience of the domestic economy.

And so what if the S&P is a couple of percentage points off its record high? He is refusing to blink while the Chinese have so much skin in the game that they might have to yield first. Either way, the markets have backed off, and are waiting for the next tweet for a sign as to where the whole trade tariff situation is heading.  At best, they will try to tread water albeit with much struggle (not a risk-off environment).

The fact that the US equity market is/was riding so high is a surprise in itself. It comes after macro data over the past few months has been mixed and, previous to it, most had thought the US wasn’t too far away from recession. Manufacturing surveys have been hit and miss, inflation appears contained, the labour market is strong and the earnings season has been mixed but surprised generally to the upside.

In credit, we trade it by staying sidelined when we have some market jitters and increased volatility whilst letting the equity markets be the release valve for it. The Vix shot as high as 20% this week, having been at around just 12-14% for most of 2019.

Primary credit generally sees the window for getting deals away close but the bid for rates has the underlying yield fall, and quite markedly on occasions. We get some spread weakness in secondary, but that is no real sign of a market in a panic. Far from it.

Secondary curves do not really budge too much under the strain. Poor liquidity doesn’t facility much activity and the level of flow/volume into it reveals a disproportionate impact on spread weakness. That reverses soon enough once markets settle.

There’s like an impasse but once we’ve dusted ourselves down, we’re off and running again. And primary usually leads the way as confidence returns. This time, we also have that earnings season in Europe to contend with and the associated blackout period which can act to curtail issuance.

Anyway, corporate bond market investors are fairly relaxed at the moment. The market is perhaps better offered for choice, but that is to be expected. We’ve seen some spread weakness but after the performance seen this year, few will quibble.

Fear stalks the market

Primary credit only threw up a bunch of sterling issues as Coop Bank and Barclays issued senior and covered bonds. respectively. In high yield, Cirsa Finance also priced €390m of a 6NC2 structure offering 4.75%. That was about it in a market in credit which was effectively closed.

May: Here to stay…for now

There wasn’t too much happening in the earnings space, while Theresa May signalled that she will hang on for as long as necessary to get her (poor) deal through Parliament. And can hang on as it appears there are not enough MPs supporting another coup (confidence) attempt against her premiership.

Gilts were better bid as a result, with the yield again heading lower and closing at 1.14% (-2bp). The potential for nervousness on the macro environment emanating from the tariff stalemate saw Bunds better bid, too, and the 10-year yield down at -0.05% (-1bp) before it closed flat at -0.04%. While in the US, Treasuries in the same maturity were yielding 2.47% (+2bp).

In equities, we had a mixed bag across Europe for most of the day, with the Dax being the outperformer, and other markets dipping in and out of the red/black. A late rally pulled them all into the black, the Dax index closed almost 0.9% higher. US equities were also in and out of the red/black, probably unsure what to make of Trump’s latest broadside, and as at the time of writing, they were flat.

Credit indices had another defensive session, with protection only moderately better bid though and we had Main rise to 62.5bp (+1bp) with X-Over just 0.9bp higher at 266.9bp.

In cash, as suggested earlier, there was little doing but we had a clear defensive bias to proceedings. That left the Markit iBoxx IG cash index wider for the third day in a row, at B+128.4bp and the 4bp of weakness in the session was one of the largest moves in a while.

Finally, the higher beta and more exposed to equity volatility high yield market took another one on the chin, leaving the iBoxx index at B+425.5bp (+10bp). That +27bp this month – and wider every session.

Have a good day.


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.