29th March 2017

Buying, holding… hoping

FTSE 100
7,343, +50
12,149, +153
S&P 500
2,358, +16
iTraxx Main
73.5bp, -1.5bp
iTraxx X-Over Index
289.5bp, -3bp
10 Yr Bund
0.39%, -1bp
iBoxx Corp IG
B+129bp, unchanged 
iBoxx Corp HY Index
B+365.5bp, +0.5bp
10 Yr US T-Bond
2.42%, +4bp

Maybe it’s just a Trump-shuffle

The pick-up in prices observed over yesterday’s session has been seen as a recovery from a Trump-wobble, just as a sell-off (seen on Monday) is also all down to a Trump-wobble. Well, Trump hasn’t really done much (some would say at all) to be given such credit.

We put it down to the daily to and fro of markets moving on the prevailing news flow, valuations and mood. Tuesday saw a better bid for equities and government bonds, unusual as that might be. We would think that on a day/month-end week bereft of any material information/economic data and the like, that some of the trading is down to quarter-end portfolio dynamics. What little that was going on was centred on the primary markets again with the corporate bond sector throwing off more deals.

Four IG non-financial deals courtesy of FCE Bank, Kering, Gas Natural and a much welcomed higher yielding 3-tranche hybrid effort from Telia (including two SEK-denominated deals).

So, four deals – and a fairly decent overall volume of issuance at that – yet spreads edged tighter. How can that be, one asks!? The link between supply/spreads – that is heavy/wider or low/tighter – is tenuous at best. Gone are the days when we would see wider or tighter spreads on the back of heavy or lighter supply, respectively.

The game has changed. There is no secondary market as such to facilitate the flow. We have developed – as a direct result of the crisis and subsequent low rates/excess liquidity – a buy-and-hold investment dynamic. So, poor secondary market liquidity results in a painful trade reversal for anyone who sells risk and subsequently wants to recover the position.

The point being, there is little chance of a ‘get out of jail for free’ card, should the credit market find an event occur that makes ‘it’ all go awry. So we position portfolios based on a firm view – that credit is now a core asset class and we’re in it for the long term. Whether one is overweight, underweight or neutrally positioned is the noise which emerges from any potential feelings of uncertainty. We for one don’t think the French elections will hold much trouble for the corporate bond market – unless Le Pen wins, but then the markets will have much more to worry about, and corporate credit will in no way be the main underperforming asset class.

The ECB’s bond buying programme is more of a dark horse because cash spreads as measured by the Markit iBoxx index have tightened only 25bp since the corporate bond purchases began (they have been tighter). But even with the heavy buying of the market (of around €1.7bn of non-financial debt per week, and almost €75bn overall in just 10 months) has failed to see spreads move markedly tighter – just 5bp this year, for example. More on this in another daily comment next week, but for now, we believe that the ECB’s interest must be:

i)   reducing cash volatility
ii)  keeping the market on a tightening trajectory
iii) curtailing much secondary activity with investors content to add risk more than even in primary

So, with the ECB the main buyer in town, there is enough Street liquidity to keep the beast happy.

Primary market still going strong

Kering CEO Francois Henri Pinault

Kering took €300m in 10-year funding from a 6x subscribed book which allowed the borrower to tighten the final pricing by 18bp versus the opening talk. Gas Natural reduced the initial price talk by 17bp for its €1bn foray (7-year maturity) costing midswaps+73bp. FCE bank’s 3.5 year floater for €750m was priced at Euribor+50bp and that was 20bp lower than the opening mumble.

The deal which most were looking to get hold of, though, was the hybrid offering from Telia. Here, the euro-denominated tranche was priced to yield 3% in a 61NC6 structure for €900m where the borrower was able to reduce the yield by 37.5bp, satiating some of the thirst for yield which still remains for many investors.

Following a hefty €4.85bn of issuance on Monday, IG non-financials delivered €2.95bn on Tuesday. The €7.8bn in those two sessions takes the total for the month to €35.5bn, and we still have three sessions in which to get business done before we close out the month/quarter. Dare we look for the €4.5bn which gets us int he €40bn+ bracket for the month?

Elsewhere, risk asset prices rise

Government bond markets were generally better bid, as suggested above. It left the 10-year Bund yield at 0.39% (-1bp) and OATs at 0.96% (-2bp) while Gilts were better offered for the 10-year to yield 1.19% (+2bp) at the close. Late into the session, the US 10-year Treasury closed to yield 2.42% (+5bp) on a Fed Governor comment about the number rate hikes we might expect. Equities had a decent session of it with the DAX up almost 1.3% with most other bourses trying to rise by more than 0.7%. The US was cheered by the news that consumer confidence in the US was at its highest level since 2000. With macro looking upbeat albeit on just that data point, there was the inevitable boost to stocks.

In secondary credit, another limited session was par for the course, but we did edge better in spread terms. Well, it was a small tightening and the index (Markit iBoxx) closed out at 129bp. Basically, little happening. And it was the same in the high yield market where we closed out with little altercation and unchanged. As for the synthetic indices, iTraxx Main was lower at 73.5bp (-1.5bp) and X-Over at 289.5bp (-2.5bp) recovering on the back of better stocks.

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.