30th August 2017

Bring it on

iTraxx Main

56.4bp, -1.1bp

iTraxx X-Over

243bp, -3bp

10 Yr Bund

0.36%, +3bp

iBoxx Corp IG

B+111bp, +0.2bp

iBoxx Corp HY

B+299bp, -2bp

10 Yr US T-Bond

2.14%, unchanged

FTSE 100 (live) [stock_ticker symbols=”INDEXFTSE:UKX”  static=”1″ nolink=”1″] DAX (live) [stock_ticker symbols=”INDEXDB:DAX”  static=”1″ nolink=”1″] S&P 500 (live) [stock_ticker symbols=”INDEXSP:.INX”  static=”1″ nolink=”1″]

Fear, not…

Another day passes and so seemingly does another fearful event. For the moment. The markets took a breather, or rather respite, from the potential for conflict between North Korea and the United States & its allies. That’s still brewing, but after the initial large drop in risk asset valuations on Tuesday, we had a calmer session of it on Wednesday – and some price recovery. Some might think that the markets are sleepwalking to disaster – it’s been a long stroll! After all, it’s yet another ‘event’ which we have seemingly brushed aside.

There have been plenty of events in these past twelve months or so. From the UK Brexit referendum result, the nerves around the French elections and the new US President (along with all his baggage) to US rate policy/moves and the potential for ECB tapering. But equities are just a handful of percentage points off the record highs set a few weeks ago, rate markets have government bond yields well-off the recent highs while credit is still well-bid and spreads just off the record tights.

The difficult moments with which we have been met have barely had much of a sustained negative impact on the markets. At worst, they have barely lasted a week when markets have dropped or been in ‘risk-off’ mode. By and large we’ve sailed through the challenges which have presented themselves. Needs must, liquidity is in need to be parked in risk assets.

There is still plenty of cash looking to get invested and especially in more yieldy risk. It makes a sustained sell-off more difficult absent a catastrophic, systemic event. Some of the money continues to find a way into corporate bond funds, and most of it then though is into IG funds. That’s not stopped the high yield markets to trade at close on the historic record levels that were seen earlier this month.

The demand for corporate bonds is undimmed and we for one think that September will be kind to investors in terms of borrowers flocking to the markets. €30bn of IG non-financial supply has to be where we ought to be anticipating in terms of the volume of supply in that market. Be prepared. In Wednesday’s session, we had BBVA issue senior non-preferred debt, Carlsberg and SSE come up for the IG non-financial sector and GM offer up a sterling deal.

Primary business as normal

The day’s deals took in a fairly rare offering from brewer Carlsberg as the triple-B rated issuer took €500m in 6-year funding at a cost of midswaps+33bp, managing to reduce the initial price talk by 17bp. SSE followed with a Green bond for €600m costing them midswaps+38bp – and 12bp lower than the opening price talk.

In financials, BBVA lifted €1.5bn in a 5-year deal at midswaps+70bp and took the monthly supply total for senior debt issuance to €6bn, with all the deals coming in the last two sessions. In sterling, GM Financial Co. printed £350m at G+158bp. There was nothing in the high yield market.

Macro upbeat

The afternoon session was greeted with the latest Trump salvo on North Korea, while the economic data was upbeat. For the latter, the AFP jobs report came in much better than expected and augers well for the non-farms report on Friday. On the economic growth front, Q2 annualised growth perked up to a 3% rate and was also well-ahead of expectations.

The numbers didn’t really have much of an impact on rate markets, which were probably more preoccupied by investors looking to get some safe-haven risk on board (or maintain it). Equities had a good session, up by around 0.5% and recovering some of Tuesday’s losses.

As for credit, the synthetic proxies had iTraxx Main at 56.4bp (-1.1bp) and X-Over at 243.7bp (-3bp) which represented a decent recovery from the previous day’s weakness. In the cash market, IG risk edged wider for choice as measured on an index basis – which left the Markit iBoxx index at B+111bp (+0.2bp). Noise really, given the lack of activity.

The same could be said of the high yield market as the better equity market backdrop compelled the Street to mark prices a little higher for choice, and the iBoxx index was left at B+299bp (-2bp).

That’s is about it. We should see some activity in primary in Thursday’s session before we ready ourselves ahead of next week’s busier September period – but not until after Monday’s US Labor Day break.

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.