15th July 2018

Calling a spade a spade

iTraxx Main

65bp, -1.7bp

iTraxx X-Over

292bp, -6bp

🇩🇪 10 Yr Bund

0.28%, -2bp

iBoxx Corp IG

B+130.9bp, -1bp

iBoxx Corp HY

B+392bp, -1.7bp

🇺🇸 10 Yr US T-Bond

2.83%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Trump sides with a hard Brexit… or does he?

We’re trading the headlines around the US President, and it’s gripping stuff. With Trump being his usual inimitable self, there is little chance that we’re going to feel overly comfortable with anything. He has dropped a few bombshells already and the UK government’s stiff upper lip has needed to be as rigidly fixed as it could be.

So the UK has been in the doghouse with the President, even as they entertain him with tea & scones at the Palace. The political impact and possible fallout did feed through into some apprehension in markets at the end of last week, leaving us to close out higher in equities but without any real zest behind it. Sterling, in particular, took some punishment as a result of Trump’s trade deal comments, before recovering after he qualified his views!

Activity overall, though, is light and the thin markets into the holidays can move sharply and disproportionately lower as they react to any negative event-risk. On the other hand, we can creep higher should the prevailing news flow be fairly neutral.

And that is what sets us up for the next period, to the end of August. It is going to be quiet. In credit, judging by the trend seen so far this year we are probably closed to any new material business. Some primary will sneak through this week, but we don’t hold out for much now – even if the window is open. Last week was a good gauge for what might have been and it seems that few borrowers are willing to get any further funding in this side of the summer.

Looking back, it’s not been a great first half or so for the corporate bond market. Total returns for the iBoxx index sit at around minus 0.8% in this period for IG credit with funds’ performance around that level or a little worse. Equities have been choppy and in Europe have generally done worse than that although we can shoot higher in stocks in double quick time should the news turn positive. Credit’s recovery will encompass a more lumbering dynamic. Spreads have widened by almost 40bp this year to B+131bp and that against a still fairly benign market for credit. Something has spooked us.

Rates have been better bid for the past month or so, that Bund yield in the 10-year stuck at around or below 30bp having been as high as 0.84% several months ago. The dynamic has shifted from one of expectations of higher and sustainable growth allowing for reduced policy accommodation, to fear of trade wars leaving the Eurozone facing a downturn and potential recession and then an existential crisis. The politics within the region are increasingly more fractious as populist parties beat the drum on the immigration debate and the establishment are sitting more uncomfortably than they would like.

So, at best, we might be looking in the context of a B+125bp to B+140bp-like range for where the cash index might go from the B+131bp level now, come the beginning of September. That is, we’re going to grind in either direction. There isn’t going much – or anything – of a primary market, save mostly for a bunch of SSA and covered bond deals.

Fake news? Not really

Trump dominated the headlines after attacking the UK’s Brexit strategy – then praising his host and looking forward to trying to negotiate a free trade deal. He was clearly in damage limitation mode, but left behind much chaos as he headed off for his meeting with Putin.

In the US, the earnings season kicked off with JP Morgan, Wells and Citi reporting for the second quarter and to varying degrees strength (JP very good) and weakness (Wells poor). Overall, the season will be a decent one and most reports will see earnings come in ahead of expectations, as usual. It wasn’t all plain sailing, as there were some of the jitters around the trade wars which led to a bigger than expected drop in US consumer confidence, the Michigan sentiment survey coming in at 97.1 (98.2 in May).

There was a small up in equities into the close, the DAX leading the way on the back of a fairly volatile week for German equities in particular. Rates were better bid in the session, leaving the 10-year US Treasury yield at 2.84% (-1bp) and the Bund yield in the same maturity at 0.28% (-2bp). Gilts also saw a drop in yields to 1.27% (-1bp) just as the deputy governor of the BoE was making a case for delaying a rise in UK rates – we don’t believe there will be a hike in August.

In credit, there was a deal on Friday and it came from high yield German borrower Kaefer for €250m in a 5.5NC2 structure costing them 5.5%. We should anticipate a steady flow HY deals over these quieter weeks, as they take several days to get away and there will be enough demand for them (and investors around) to help them along.

The indices closed with some solid gains, outperforming equities, with Main left at 65bp (-1.7bp) and X-Over 6bp tighter at 292bp. For the week, that meant that Main was 4.4bp tighter and we had X-Over protection lower by 13bp in the same period.

The IG iBoxx index ended the week at B+130.9bp, around a basis point tighter on Friday and 4bp tighter in the week. The high yield index was a bit of an underperformer in Friday’s session and closed 1.7bp tighter at B+392bp. That was, though, a solid 13bp tighter in the week.

Let’s not forget about the sterling market. It has seen some decent levels of issuance of late and the market is in decent shape. The iBoxx sterling index closed last week at B+160bp, 2.3bp tighter in the week, which leaves it 29bp wider year to date.

This week, the US earnings season ramps up a little with the likes of BofA, Goldman and Morgan Stanley for the banks due, with J & J and Microsoft opening the account for the blue-chip non-banks. The focus though, as ever, will be on the Trump-Putin meeting, while a delegation from the EU establishment is in China for high-level talks.

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.