22nd April 2019

Back to Safety

iTraxx Main


iTraxx X-Over


🇩🇪 10 Yr Bund

0.02%, -5bp

iBoxx Corp IG

B+127.4bp, +0.8bp

iBoxx Corp HY

B+338.3bp, +2bp

🇺🇸 10 Yr US T-Bond

2.56%, -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″]

Stuttering into a policy response

We head into the final week of the month reeling from a weak set of economic data from the Eurozone, which came just a day after China posted better than expected GDP numbers for the first quarter. French and German PMIs for the manufacturing sector show that activity has slumped and is set to remain weak (in contraction). Services are doing better in these two countries, but for the block as a whole are weakening, too. The euro has weakened, rates got a better bid, equities rose (because of the weak currency) and we’re back to square one in a flash.

Markets habitually cling on to positive data hoping that the macro tide has turned, but in reality, we know it hasn’t and the central banks are surely close to a policy response.

Investors return to the safety net of government bonds

That poor data was enough to have investors rediscover their interest for the safety of government bonds, and particularly in Europe, we saw a good rally. The 10-year Bund rallied 5bp in yield to close the week, giving just 0.02% and the equivalent Gilt yield declined to 1.18% (-5bp as well).

The salutary lesson is that while we will get the odd data points suggesting we may have bottomed in macro, we are anything but.

Suckers’ rallies are going to come thick and fast. However, as we have suggested in previous comments, we need to lean clearly on macro weakness and position accordingly. We still believe that the path of least resistance is going to see yields in the underlying head lower and warn against getting too far ahead in hoping that macro might be stabilising.

That certainly seemed to be the case in that final session last week. That significant end of week rally in European duration helped HY returns to push on to 6.6% year to date – with the HY iBoxx index yield also dropping to a 2019 low of 3.57%. That will be reflected in the all-in funding costs for HY corporates who might wish to try their hand at (pre/re) financing any maturing obligations – of course, while the going is good.

And that going is good across the credit spectrum at the moment. Inflows are coming in thick and fast (relatively) for credit funds. Low underlying yields and that need for a bit of juice from investors keeps the bid for corporate credit risk intact.

We’re only closing out the first third of the year and, as well as that superb performance in the high yield market, the CoCo market is giving investors returns of 7.5% year to date (iBoxx index).

It gets better. The low beta IG market has returned 3.6% (!) this year, setting us up nicely as we come back after the Easter break. In the meantime, the index yield has dropped to 1.04% – the lowest level since Jan 2018. That’s just 21bp away from the record low of 0.83% seen in Sept 2016, just when we were peak excited about the ECB’s corporate QE programme.

Primary. How much?

Primary credit managed to get off to a flying start in the opening week of the month with IG non-financial supply of €8bn, but that has been followed with a fairly significant pre-Easter drop to just €4bn of issuance in the past two weeks. Some of that might be earnings season blackout period related. It is going to be difficult therefore to judge whether the high level pace of issuance we have had this year so far is going to be maintained through May. Not taking any chances – or just frustrated, investors might just bid up the secondary market some more.

So for the month to date, with a week of business left before we close it out, we have the month to date deal total at €12bn and the year to date level at €96.5bn. That compares with last year’s total of €14.5bn (full month) and €70bn (end April), respectively. We’re ahead year to date, but last year’s full-year issuance was the lowest since 2012.

The high yield market has been more sprightly that it had been in the opening quarter, with €6.6bn of deals in the month and the year to date level looking much more respectable at €17bn. We’re not going to reach the annual levels seen in 2017 (record €75bn) or 2018 (€62bn). However, the reduced funding costs and lack of event risk (so far) in the sector might see the improved demand for HY corporate risk see an increased number borrowers seek to tap the markets as they look to push out that wall of funding out even further.

The senior market has had a good month, too, with the deal total up at almost €12bn and ahead of last year’s April total. The month to date has us up at €55bn and probably on target for somewhere in the region of €130bn – €150bn.

Easy does it

The US earnings season continues

As for this week, the data brings us US GDP for Q1 on Friday (expected to be 2% QoQ) as well as consumer sentiment, durable goods and retail sales numbers. The US earnings season – mixed but with some upside bias we think with numbers a touch better than expectations, sees a step up in the number of companies reporting. CoCa-Cola, United Tech, AT&T, Boeing, Caterpillar Microsoft and Intel are among those all due to report.

As for Monday, oil rallied after US dropped sanction waivers on Iranian oil (they end in May). Brent was up at $74 per barrel (+2). In Asia, stocks were up to 2.7% lower after some warnings from Chinese authorities on real estate investment as well as several companies announcing IPOs.

We closed last week with iTraxx Main at 57.5bp and X-Over at 247.5bp. The cash market was a touch better offered, if anything, leaving the iBoxx cash index (IG) at B+127.4bp (+0.8bp) and the high yield index at 338.3bp (+2bp).  These were the first reversals in spreads in a while.

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.