- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
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Euro credit reigns….
ECB Thursday always gives the markets a day off, even if we are well-prepared to expect little change in policy. The July meeting might matter a little more. And so we drifted through the session and it is likely that, being so close to month-end, Friday will trade out in similar fashion especially as we digest a plethora of data due from both sides of the Atlantic. In credit, the all-important primary market in April has delivered deals in small showers, and never really threatening much more. To coin a phrase, we can only hope therefore that May flowers and that the imbalance between supply and demand is corrected in investment grade markets. The deal flow here has been shockingly poor.
High yield has been something special. We have positive returns in the asset class, a supply run rate well-ahead of last year’s record-breaking total, good demand for deals and a pipeline suggestive of 2018 being another record-breaking year. Who would have thought? Our (and most) predictions were for a reduced level of supply. Expectations of higher rates, reduced demand and rich valuations were all thought to be drivers for the lower levels of issuance and we were looking in context of a 20% drop in supply. Instead, rate markets so far have been steady in Europe. The 10-year Bund yield might have seen 0.80% in Q1, but it is now at 0.0.59% and the 2-year yield is still trading off a -0.50% yield handle. That is, in Europe, cash is still expensive. Investors are still content to buy corporate bonds.
We are far from turning the corner in euro-denominated corporate bond markets. Of course, there is much risk of contagion from more jittery US credit markets, where interest rate risk is elevated. Emerging market and high yield rated borrowers in dollar debt markets are feeling the pinch. But as we highlight in Wednesday’s note, the problem of a lack harmony in growth between the various global regions is a positive for the moment in terms of relative performance (between euro/dollar credit).
Euro credit spreads haven’t gone to hell. IG is less than 10bp wider year-to-date and high yield spreads less than 30bp (Markit iBoxx index). Significant pressure in the US credit market would have an impact here – it always has, but from a relative performance perspective, euro credit will outperform in spread terms. While higher US rates are busting total returns in dollar credit. For example, and it is not totally like for like, but a good comparison indicator nevertheless: the iBoxx Eurodollar corporate bond index spread is 17bp wider this year, and returns are at -4.7% versus the euro-denominated index showing +7bp and -0.7% of spread and total returns performance, respectively.
The July ECB meeting matters more
Quelle surprise. As expected, the ECB left it all unchanged with the deposit rate at -0.4%, the refinancing rate at 0% although they were prepared to continue with the reduced €30bn bond-buying programme beyond September, if necessary. That’s why the July meeting is more important as we might get some meat on the bones as to how the purchase programme might evolve post-September. Perhaps a reduction in purchases to either €10bn or €15bn (?) as the taper continues would be a reasonable expectation – if only to appease the more hawkish members of the governing council.
Interestingly, Draghi did mention that there was no specific strategy behind the lower purchases of corporate bonds and suggested that the averaging down coincided with seasonal factors given higher average levels of purchases previously as well as the reduction of the overall purchases (from €60bn to €30bn).
Other than that, he played everything with a straight bat as per usual, even if he did acknowledge that there was some moderation in growth given the recent macro developments. Still, he appeared unfazed by the related economic data points (but cognisant of the potential for weakness) exuding a fairly confident tone in his view that the underlying economy in the Eurozone was in reasonably good shape.
So we look forward to the meeting in July, by which time the ECB will have much more data and be able to better assess the outlook and how they might proceed with tapering of the QE purchase programme amid hints also of other policy actions to come.
Up, down…. then up
There was a good rally in rate markets which saw the 10-year US Treasury yield dip below 3%, to 2.99% (-3bp) as the Bund yield in the same maturity dropped to 0.59% (-4bp). Some of that for Bunds might have been related to Draghi’s (slowing growth) comments and expectation – therefore, that policy will stay very accommodative for some while yet. We closed with a 1.50% yield (also -4bp) on the 10-year Gilt.
At the same time, we had a rally in equities, with the Dax up 0.6% as US stocks added over 1%.
In the primary market, the deal flow had Finnish utility Teollisuuden Voima print €400m. It is rated in the X-over category, and sits in the iBoxx HY index. Another one for that supply total. Anyway, the borrower issued at midswaps+160bp (-10bp versus IPT) for a 6-year maturity garnering a book of over €800m. Also in the high yield market, we had Italian paper manufacturer Fedrigoni’s €455m 6.5NC1 deal priced at Euribor+412.5bp. They were due to be followed by Refresco‘s €445m 8NC3 deal and Atalian‘s 7NC3 €610m (split between €/£) offering.
The deal flow continues to deliver a steady stream of borrowers which have taken the total HY supply for the month to just shy of €10bn (with more to come on Friday), while for the year-to-date we are now up at €28bn. That is an incredible €6bn more than for the same period last year. The opening four months of 2015 saw €32bn of issuance before we faded the activity to close the year with just €48bn worth of deals.
Only a major market disruption would see that dynamic occur again, and while there is a non-trivial probability that it might happen (Trump and geopolitics risks are elevated, after all), we are currently heading for a record year as things stand.
Record HY Issuance Year?Elsewhere, 100% state-owned and mid-single A rated Estonian transmission system operator Elering issued €225m in a 5-year at midswaps+47bp (-18bp versus IPT). Santander in the UK issued £350m of 3-year OpCo debt along with an 8NC7 maturity transaction for £500m of HoldCo debt.
So secondary cash was quiet but didn’t really move much – wider though. We were left with the IG iBoxx index a touch wider at B+103.5bp (+0.4bp) whereas the high yield iBoxx index closed at B+319bp (+4bp).
The iTraxx indices fed into the lower yield environment and higher equities, with Main 1.8bp lower at 54.6bp and X-Over some 7.2bp lower at 271.9bp.
Have a good day.
For the latest on corporate bonds from financial news sources, click here.