4th May 2017

Britain fights back

FTSE 100
7,235, -16
12,528, +20
S&P 500
2,388, -3
iTraxx Main
65.2bp, -0.4bp
iTraxx X-Over Index
258.7bp, -2bp
10 Yr Bund
0.33%, unchanged
iBoxx Corp IG
B+120.8bp, -1bp 
iBoxx Corp HY Index
B+340bp, -4bp
10 Yr US T-Bond
2.32%, unchanged

EU/UK hostilities increase

The session passed us by with little to trouble anyone, and that was to be expected ahead of the FOMC rate decision. There was also the small situation around the evening’s potentially crucial debate between Le Pen and Macron in the final face-off before Sunday’s vote. The Brexit brouhaha was ongoing amid leaks and potential for bullying and so on, but all parties must remember that the UK is a major EU/global player and goes into talks with considerable strength.

The UK’s situation is completely different to that of Greece (the other recent ‘dissenter’) and adopting of the heavy-handedness with which the Eurozone has frequently used against Greece will simply not have the same impact.

We had a corporate bond deal; Two, in fact, in the IG non-financial area to get the account up and running for this month.

So, primary offered a couple of scraps in which to park up some cash with GM and Brisa in the market in the non-financial sector. The former lifted €1bn in a 4-year floater transaction and the latter just €300m in a 10-year at midswaps+160bp, but managed to reduce the initial price talk by 25bp for the effort (having been over 10x covered). Even GM took 17bp off the initial price talk for their shorter-dated offering. All this supports the point we have been making that coming to the market now, amid little or no competing deals to distract, allows borrowers to reduce pricing markedly given the massive levels of demand for deals in which to invest. Criteria Caixa was the other deal in the market, taking €750m in 6-year money off a €2bn book.

After a very poor April for IG non-financial primary markets which saw just €5.6bn of deals, we have high hopes that May will correct a fair amount of that previous imbalance. In May 2014 we had €22bn of supply, which was followed by €28bn in 2015 and a whopping near-record for any month in May last year of €45.4bn! We don’t expect to test the level of last year, given that we will have lost a week into the French elections, but we need to be looking at around €30bn for the month, or we believe the year will disappoint overall.

Eurozone macro upbeat

Q1 2017 GDP growth for the Eurozone came in at a better-than-expected 0.5% and has been running at a 2% annualised rate since the end of Q3 last year. We could argue as to whether that rate is sustainable for the whole of 2017, but it is fair to say that the region is on a solid footing and ought to come close to that growth rate for the full-year. With that likelihood, the ECB will stay on hold given the prospects for inflation to remain extremely subdued. There’s also the risk of a slowdown in consumption growth as the year progresses (as in previous years) and so the need to remain vigilant to the downside risks. The recovery bears all the hallmarks of being a fragile one, but 1.8% or more for 2017 would be a good outcome.

As a result, we don’t think that rate markets are going to see yields break out of their established ranges, save for a contraction in the Bund-OAT spread if Macron does win this weekend (dropping to 41bp now). For 10-year Bunds, that means we stay in a 0.20 – 0.50% range and that sets the standard for the rest. Mind, in the US, the recovery is recording disappointing levels of GDP growth and US Treasuries are also reacting accordingly, failing to break out of the established range there for the 10-year, of 2.20 – 2.50% (currently at around 2.32%).

FOMC curtails activity

With the FOMC coming after the market close, we were never going to have an exciting session. So equities played out in a tight range a little higher across the Eurozone and lower in the UK – while the US was also recording markets in the red. Government bonds did little and we saw barely any moves in prices. And that was also the case after the FOMC decided to keep it all unchanged, in an underwhelming post-meeting communique.

In credit, primary dished up a couple of deals (finally) in non-financials while the Criteria Caixa deal was the sole one for the euro-denominated financial sector. The HY market drew a blank in euros, while Amigo Loans was the sole print for sterling HY. As for the secondary market, it’s all hands to the pump.

The IG Markit corporate bond index closed at B+120.8bp which was a basis point lower in the session but 23bp tighter this year and the lowest level since Q3 2016. The high yield bond market saw the index down a further 4bp – some 73bp lower year to date, and at B+340bp the lowest level since July 2014. Give me yield! Even the sterling corporate bond market joined the cash party, the index lower at G+146bp (-1.7bp) as the market was better bid.

Credit protection costs declined again (and against what we might have anticipated going into the weekend’s French election), with Main now at 65.2bp (-0.4bp) and X-Over at 258.7bp (-2bp).

On a housekeeping note, there will be no daily tomorrow due to a prior engagement.

Have a good day, we will be back on Monday.

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.