22nd March 2017

Beating the drum (for corporate bonds)

FTSE 100
7,378, -51
11,962, -91
S&P 500
2,344, -29
iTraxx Main
76.5bp, unchanged
iTraxx X-Over Index
295bp, -1bp
10 Yr Bund
0.46%, +2bp
iBoxx Corp IG
B+129.7bp, -0.7bp 
iBoxx Corp HY Index
B+362bp, -3.5bp
10 Yr US T-Bond
2.42%, -6bp

All roads still lead to…

The markets have taken much that has been thrown at them in their stride – that’s everything. Either they don’t care or the central banks and/or government officials are doing a good job in soothing nerves and preparing the markets. It might be difficult to believe that it is the latter, but maybe it is.

The net impact at the moment is that the money trade is to go with the flow. Momentum works while we can forget about fundamentals (& they seem to be improving). The old adage comes to mind in that ‘the trend is your friend’. Until it is not.

That leaves us with government bond yields range bound with 10-year US Treasuries in a 2.30 – 2.60% area and Bunds in a 0.20 – 0.50% complex, and we have seemingly established entry and exit points. Mind, generically, cash is still too expensive to hold, so it needs to be invested. One could argue that we therefore head for the “least worst” product, which is still corporate bonds.

There is much to ponder from yesterday’s session. The annual rate of inflation in the UK rose to 2.3% – above the BoE’s 2.0% target rate and higher than the market’s expectations. There is going to be no rate hike anytime soon as the inflation data comes amid fears of a slower growth dynamic, in our view, but the market’s response was a textbook one.

We had higher Gilt yields as investors will demand higher fixed income returns on rising inflation fears (10-year Gilt yield up at 1.27%, +4bp before closing at 1.26%), while sterling rallied on higher (market or policy) rate expectations to $1.2480 (+1%). We haven’t seen either of those levels for several weeks, and the low and previously declining Gilt yield was a major driver of returns for corporate bond investors. Oops.

In France, Macron and Fillon were thought have had a decent presidential debate overnight but while we didn’t read too much into it, the markets attempted to. So, 10-year OAT yields were lower at 1.10% (-1bp) and outperformed amid mixed but moderate bond market weakness. Bunds for the same maturity were yielding 0.46% (+2bp).

But where were the corporate deals?

The primary investment grade corporate bond market drew a totally unexpected blank. No deals in senior financials or IG non-financials. And we’re not sure why! After all, the pipeline is considerable, roadshows are ongoing, conditions to get a deal or two away are excellent (demand/lower levels of issuance) and funding costs for the moment are still very attractive. It would seem that borrowers are also unafraid of what the French elections might bring come that mid-April to mid-May period. That is, they will also take it in their stride.

€180m deal: Cerba Healthcare

Arrow Global was the principal corporate borrower in the session with an increased €400m 8NC2 structure for the high yield market, although we also had a €180m deal from Cerba Healthcare to take the deal tally to a stunning €6.6bn for the month so far. But that was it.

We don’t usually get too many months where supply exceeds €6bn from high yield entities – the last such month being September 2016. The rest of the deal flow was around covered bonds and SSA borrowers although Danske Bank issued an AT1 structure – which was massively oversubscribed – in the dollar market.

Risk-off as US comes to play

The markets in Europe were holding up well, setting highs not seen since 2015 until the US opened and we went lower. Declines of around 1% in the US were enough to set the ball rolling here and the screens turned to a sea of red. That gave government bond markets a leg-up, though, and some of the earlier losses were reversed in this market. The 10-year US Treasury yield dropped 6bp to 2.42%.

And so to the corporate bond market. A lacklustre secondary session nevertheless saw spreads tighter and the Markit iBoxx IG cash index broke through the B+130bp barrier for the first time this year, as it was closed out at B+129.7bp (-0.7bp). Nothing happened in the sterling corporate bond although spreads edged a touch better for choice.

In the high yield market, weak equities and a declining oil price failed to deter a better bid for the market and spreads (as measured by the iBoxx index) tightened to B+362bp (-3.5bp) and just 2bp off the year’s lows. This augers well for the secondary HY market given that a steep fall in stocks and lower oil didn’t necessarily lead to wider spreads. And finally, iTraxx Main (S27) closed at 76.5bp (unchanged) and X-Over at 296bp (-1bp). US equity losses accelerated into the close (S&P -1.2%, while Nike and Fedex revenues/profits fell short of expectations – posted after the close), and that all might set the tone for today’s session!

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.