3rd April 2018

Armchair investor

iTraxx Main

60.5bp, +0.8bp

iTraxx X-Over

288.3bp, +5.3bp

10 Yr Bund

0.50%, unchanged

iBoxx Corp IG

B+108.3bp, +0.8bp

iBoxx Corp HY

B+336bp, unchanged

10 Yr US T-Bond

2.78%, +5bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

No getting down and dirty…

We flip the page into the second quarter, trading the book in the same way. There is no change in strategy as a defensive mindset prevails. Sentiment for the whole gamut of risk markets is gauged by how equities might be performing, and they’re seeing 1%+ falls on too many occasions to believe that we might turn a corner anytime soon.  However, with overnight falls in US stocks in some cases approaching 3%, European markets tried to stage a bit of a fight back at the open as they resisted any early major onslaught to drop hard.

Unfortunately, the confirmation of a slowdown in the growth rate across the Eurozone manufacturing activity will have markets think again. The Euro area’s manufacturing activity is still expanding, but the pace of it slowed in the opening quarter. And understandably so, given that we are faced with uncertainty on several fronts, not least on that global trade situation.

It looks like we will be seeing the lightest of activity in the very near future for credit. Secondary turnover and interest have been a busted flush for an age. Even the ECB’s accumulation of an average close on €6bn a month of IG non-financial corporate debt is failing to stem the weakness in spreads following a 17bp widening in IG markets in March (iBoxx index). With the lowest levels of quarterly supply for several years whilst we know demand is still at decent levels, that’s suggestive of a manufactured spread market (spreads too tight), perhaps losing some lustre.

The supply/demand imbalance ought to have spreads this year (+10bp) at least unchanged, in all reasonableness. Macro might be showing some signs of weakness, but it is coming off a very solid growth rate seen at the back end of 2017. Yes, there is some event risk in the air and the tariff spat looks like it will fester for a while. Trade levels, sentiment and investment all promise to come under some level of weakness. But we have had worse over the past few years – and spreads markets have been well supported.

Time to sit back?

So why now, the weakness? Stock market volatility and weakness is at elevated levels. There is fear that we might be heading for something more sinister. Credit won’t rally in isolation – it never has. That safe-haven bid is back to some extent (in Europe) and credit isn’t managing to hang on to its coattails. It did in 2015-2017, because it was convenient to do so. We’re looking at credit in a different way now.

Few investors are dipping their toes into the secondary market (getting filled isn’t too difficult at the moment – let the ECB have it). It’s easier to go with the herd and stay with primary (which is hardly throwing much up anyway). It seems a defensive mindset is in place, whereby investors are preferring to stay sidelined until macro stabilises, we have some predictably around the trade situation and equities go higher. Then credit can rally, and we won’t be too disheartened that we didn’t buy the dip. Isn’t it always like that?

Sometimes it is better to be an armchair spectator rather than a player who gets down and dirty in the pouring rain.

April showers…

Equities spent another session the red in Europe, unable to drag themselves into the black even as US stocks were up sharply in the day. We were playing catch up to some extent. The Dax closed 0.78% lower at 12,000 (-917 YTD) while the FTSE managed to hold 7,000 at 7,031 (-25). Duration though in Europe might have little difficulty in being supported given the machinations in global macro and the various event risk situations we are faced with.

The 10-year Bund yield was unchanged at around 0.505% (as were Gilts to yield 1.36%, 10-year) even as US yields headed higher (10-year 2.78% +5bp). It’s a big ask now to expect rate markets to sell-off hard from here, and the bearish forecasts predicting close on 1% yield for the 10-year Bund this year look unlikely to materialise as things stand – although we still have nine months to go! On the other hand, three month US dollar LIBOR might have doubled to almost 2.30% over the past twelve months, and there might be some trouble ahead for floating dollar borrowers (and EM issuers), but that’s not the case in Europe.

Credit primary had Capgemini opening the issuance for the quarter in euro-denominated IG non-financial corporates, with a dual tranche offering for a combined €1.1bn. €600m of that total came in a 6.5-year maturity at midswaps+52bp (-13bp versus IPT) and €500m was issued in a 10-year at midswaps+82bp (also -13bp versus IPT), with a combined book at around €3.6bn.

Elsewhere, the iTraxx indices edged higher as we might anticipate given the weaker European equity markets, and Main edged up to 60.5bp (+0.8bp) while X-Over rose 5.3bp to 288.3bp.

In cash, the Easter holiday break on Monday delayed the update from the ECB on its latest QE purchases. Cash was quiet and volumes light in Tuesday’s session but we edged wider such that the Markit iBoxx IG cash index moved to B+108.3bp (+0.8bp). The high yield market proffered little, closing unchanged at B+336bp (iBoxx index).

The markets ought to be better aligned today. 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.