Category Archives for "Corporate Bonds"

7th July 2019

Liquidity aplenty, but expensive to hold

MARKET CLOSE:
iTraxx Main

50.2bp, +1.4bp

iTraxx X-Over

243.5bp, +6.7bp

🇩🇪 10 Yr Bund

-0.36%, +4bp

iBoxx Corp IG

B+119bp, -1bp

iBoxx Corp HY

B+399bp, -2bp

🇺🇸 10 Yr US T-Bond

2.03%, +8bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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… and greater risks emerging

Until the late pull back when markets were undermined by the minutiae of the timing of any Fed rate cut, it was looking fantastic. Actually, we don’t think it changes much and it is looking very good still. We’re in the midst of the mightiest bond grabfest in history. We have record low bond yields. Corporate funding costs are collapsing. The S&P500 was almost at 3,000 (and up almost 20% this year) is no mean feat, either. It’s record-breaking territory almost everywhere one looks. All that is left is for corporate bond spreads to tighten – a lot – to join the record breakers club. It’s a euphoric time but declining yields/rate cuts/injection of liquidity into markets are no panacea for macro recovery.

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2nd July 2019

Treading water

MARKET CLOSE:
iTraxx Main

59.7bp, -1.1bp

iTraxx X-Over

243.5bp, -3.3bp

🇩🇪 10 Yr Bund

-0.37%, -1bp

iBoxx Corp IG

B+123.6bp, -1bp

iBoxx Corp HY

B+412.5bp, -4bp

🇺🇸 10 Yr US T-Bond

1.98%, -5bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Keeping the faith…

The euphoria of the month’s opening session hit a brick wall, leaving us with what could best be described as a more reflective day for the most part. Hopes and positive soundbites driving markets higher were replaced by the need for something more concrete to emerge from any US-Sino talks. Markets were treading water. Macro is in need of a boost and help can’t come soon enough – and we need more than just a US rate cut. We could have done without the US proposing additional tariffs on $4bn of European goods over the long-running dispute on EU aircraft subsidies.

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1st July 2019

Eurozone rates pencil in depression!

MARKET CLOSE:
iTraxx Main

50.8bp, -1.2bp

iTraxx X-Over

246.8bp, -5.7bp

🇩🇪 10 Yr Bund

-0.36%, -3bp

iBoxx Corp IG

B+124.5bp, -0.5bp

iBoxx Corp HY

B+416.6bp, -2bp

🇺🇸 10 Yr US T-Bond

2.04%, +4bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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The market expects…

It could only ever have been a positive session following the weekend’s events. President Trump gave reason aplenty for risk markets to rally as pressure eased on several fronts. Hopes of a reasonable trade tariff outcome, the softening of the US stance on Huawei and, for good measure, the love-in at the Korean demilitarised zone all contributed.

The equity rally took in a fresh record high for the S&P500 index and while US rates gave some back, we didn’t quite get the same trade in European rate markets. Far from it. We set new intraday record low yields in several 10-year benchmarks (Bunds -0.363% and OATs -0.054%, for example). The Bund curve is just 3bp away from being in negative yield territory out to 20-years!

That came courtesy of the poor manufacturing PMI reports across the region showing a further and deeper contraction in June, providing more evidence for the ECB needing to react sooner rather than later. The market is positioned.

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30th June 2019

Please, sir, I want some more

MARKET CLOSE:
iTraxx Main

52bp

iTraxx X-Over

252.5bp

🇩🇪 10 Yr Bund

-0.33%, unchanged

iBoxx Corp IG

B+124.8bp, -0.5bp

iBoxx Corp HY

B+418.5bp, -5bp

🇺🇸 10 Yr US T-Bond

2.00%, -1bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Everyone’s a winner…

We are needing to go some to match that first half. It was just about the best six month period ever for markets as equities, rates, credit, most commodities and even Bitcoin managed the most impressive of returns. For 2019 overall, we actually don’t need to match it to register a good year, and even if we give a little back it would be view as being a super year. Equities 17%+, Eurozone rate market 6%, IG credit over 5.5% (iBoxx), HY credit close on 7.5% and the AT1 market 10%. As good as it gets?

A second QE-inspired government bond programme will see market yields likely plummet from these levels, where -0.50% on the benchmark 10-year Bund yield (currently -0.33%) would be unavoidable and just a quick breather on the way to -0.75%. We wouldn’t be surprised in that situation if the whole German curve – to 30-years, saw negative yields.

Coming hot on the heels of that – or in conjunction with it, a second corporate bond purchase programme by the ECB will see IG and HY credit spreads crunch lower and head into record territory. There’s a way to go, but we will get there cross all credit markets. The iBoxx IG index yield is already at around its record low (0.74%) and an ECB involvement in the credit market at these levels would leave the resulting grabfest pushing those yields to sub 0.50% levels.

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27th June 2019

That’s a cracking first half

MARKET CLOSE:
iTraxx Main

53.7bp, -1.2bp

iTraxx X-Over

256.4bp, -7.5bp

🇩🇪 10 Yr Bund

-0.32%, -1bp

iBoxx Corp IG

B+125.3bp, unchanged

iBoxx Corp HY

B+423bp, -3bp

🇺🇸 10 Yr US T-Bond

2.00%, -4bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Now sit back and enjoy the G20…

It got a little precarious through May, but we have recovered extremely well leaving us effectively to almost charge our way through a great first half of 2019. The reality check will come later. The markets have kind of fizzled out from an activity viewpoint this week reflecting both the super performance they have all had so far this year, but also the potential for a nasty surprise emerging from the G20 meeting this weekend.

Nevertheless, in credit, IG is up by around 5.5% (iBoxx index), HY credit returns have exceeded 7% and the CoCo market is close to delivering 10%. Even after some recent weakness, the total return Dax index has returned almost 16% and the S&P index is up by over 16%. IG spreads are 47bp tighter year to date, the CoCo index has tightened by 165bp and the HY market by 100bp.

The primary market is going great guns, too, and the high volume of deals has failed to have a negative impact on spread markets. That is, investors have had deep pockets and plenty of room to absorb the issuance that has come by. A massive €165bn has been issued from IG rated non-financials and it has come at a record run rate – with no ECB QE to compete with investors for the paper, as yet.

“So George, where did it all go wrong?” asked the hotel bellboy to George Best.

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25th June 2019

Fixed… income, really!

MARKET CLOSE:
iTraxx Main

54.8bp, +0.6bp

iTraxx X-Over

261.5bp, +4.7bp

🇩🇪 10 Yr Bund

-0.33%, -2bp

iBoxx Corp IG

B+125.3bp, unchanged

iBoxx Corp HY

B+426.5bp, +6bp

🇺🇸 10 Yr US T-Bond

1.99%, -3bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Snoozing to the halfway point…

It looks as if the G20 meeting has come at just the most opportune of times, clearly leaving the markets unwilling to take a significant directional view as investors wait to see how any meeting between Trump and Xi turns out.

We’re not quite treading water in the strictest of interpretations, but risk markets are not doing too much while there has been a better bid for safe havens. So it’s all come at a good moment because we are going to see out the first half with all markets delivering for investors, amid high degrees of macro and geopolitical uncertainties. Strange, that.

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24th June 2019

Bandwagon rolls on

MARKET CLOSE:
iTraxx Main

54.2bp, +0.5bp

iTraxx X-Over

256.8bp, +2bp

🇩🇪 10 Yr Bund

-0.30%, -2bp

iBoxx Corp IG

B+125bp, unchanged 

iBoxx Corp HY

B+420.5bp, +3bp

🇺🇸 10 Yr US T-Bond

2.02%, -5bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Opportunity to jump on…

We’re in bandwagon territory, but few are neither advocating or thinking of getting off it. In fact, the thinking is that there is more to go and there’s a quite a scramble to get on board. Equities are close on 20% higher this year, fixed income in its safest form has given almost 6% and even Bitcoin is up at or near $11k a coin. Not bad. Government bonds are in uncharted territory from a yield perspective, but they are no longer viewed as interest-bearing instruments. The price is going up and that’s what motivates the investment now.

The next fixed income instrument in the pecking order, however, takes in the corporate bond market and it is on course to deliver its best performance since 2016 (when IG returned 5%, HY 11%). IG has already easily bettered that 5% year to date, although we do have a full six months to go in which much could go wrong.

Overriding it all is that we have a good inkling that the ECB will soon be in action (QE) and into that, it should serve to continue the squeeze in spreads. There is every opportunity that we close this week/first half with the IG iBoxx cash index at its tightest level for 2019 having corrected the severe widening seen in May. There’s only 4bp to go.

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23rd June 2019

Let the music play on

MARKET CLOSE:
iTraxx Main

53.7bp, unchanged

iTraxx X-Over

254.8bp, +3.4bp

🇩🇪 10 Yr Bund

-0.285%, +3bp

iBoxx Corp IG

B+125bp, -2bp

iBoxx Corp HY

B+417.8bp, -1.5bp

🇺🇸 10 Yr US T-Bond

2.06%, +6bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Fill your boots…

There’s nothing delicate about it, but we are nicely poised to finish off the first half of the year with some style! Into the final week of the first 6 months of 2019 and it’s been a boon period for contrasting – and not always the right – reasons, for all asset classes. The global economy has a sickly feeling about it and awaits the next stimulus measure to help it to the next appointment, whereby likely yet another dose of medicine will be administered. Everything else feeds off it.

The Dax has outperformed – and fixed income hasn’t been too shabby, either

The Dax is up almost 19% and the S&P500 has risen by around 17.5% (setting record highs for the S&P/Dow in the process) but there is also a great story in fixed income. We struggle to find a time when Eurozone bonds (iBoxx index) have returned, in any period, anywhere close to 6% – let alone exceed that number. In credit, the AT1 sector takes the plaudits, with returns for this highest beta of products at a stunning 10% year to date (index 190bp tighter), and 4% this month alone.

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19th June 2019

About turn!

MARKET CLOSE:
iTraxx Main

55bp, -1.5bp

iTraxx X-Over

256.3bp, -4.5bp

🇩🇪 10 Yr Bund

-0.285%, +4bp

iBoxx Corp IG

B+130bp, -4.5bp

iBoxx Corp HY

B+434bp, -14bp

🇺🇸 10 Yr US T-Bond

2.05%, -1bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Cold’ish Turkey moment…

After the huge excitement generating rallies across all markets, the comedown. Time for some respite and reflection before we no doubt have another frenzied period where rates rally, equities push-on on the back of easier central bank policy and credit spreads tighten even as borrowers flood the markets with deals.

Against the odds, it’s been an excellent opening half of the year for the fixed income markets as rates and corporate credit sit on the most impressive of performances. The quality-end of the market has generated total returns of around 6%, for example. The AT1 market, a stunning 9.6%! Elsewhere, despite the trade fears and the weakness of the domestic manufacturing sector – and a fair dose of market volatility, the Dax hasn’t done too badly, returning 17% year to date!

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18th June 2019

Runaway train

MARKET CLOSE:
iTraxx Main

56.5bp, -4.1bp

iTraxx X-Over

260.8bp, -13.4bp

🇩🇪 10 Yr Bund

-0.323%, -8bp

iBoxx Corp IG

B+134.4bp, -1.4bp

iBoxx Corp HY

B+446bp, -4bp

🇺🇸 10 Yr US T-Bond

2.06%, -3bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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It’s all gone Japanese…

The hidden subliminal message is to buy corporate bonds… or anything fixed income, rather. The intraday record low -0.329% yield for the 10-year Bund is clearly milestone territory, but that is not the target level we should be looking at. It’s -0.50% although at this rate, we might be staring at -0.75% soon enough. Long gone is the time when we thought we would never see a negative 10-year Bund yield. In a sense, the Bund has become a commodity and not an interest bearing instrument – driven purely on supply and demand. If traders (the market) think it is going higher, few will care about the ‘arithmetic’ yield.

It’s getting scary but it is also exciting. The 8bp intraday drop in the yield on this benchmark in the session came courtesy of a stampede for fixed income assets as Draghi finally yielded to macro reality – and what the markets were already positioning for. That is, the lack of an improvement in the outlook and the inevitability of more policy action, namely QE and/or a rate cut.

Incredibly, and taking a conservative stance, we might be looking at 7%+ returns for IG credit this year as a possibility which means 12%+ for the AT1 market. After all, we’re where we are without any direct assistance.

The huge rally in government bonds, generating massive total returns of 5.8% year to date in the Eurozone (iBoxx index) has also added much lustre to corporate bonds – which themselves were reeling just a few months back, through Q4 2018. Returns for IG so far in 2019 come in at 5% even as spread markets have been a little shy in resuming much tightening after some considerable weakness in May.

The IG cash index record low yield was 0.83% (Sept 2016) and the record low spread was B+82bp (Feb 2018). Both came courtesy of the ECB’s QE programme. At the moment, these levels reside at 0.91% and B+136bp, respectively. We can probably see a new record low index yield (only 8/9bp to go) without any manipulation of the market by ECB QE activity. Macro is just so bad/worsening that investors expect it though, and Draghi has just suggested it is possible.

For spreads, it has been a little more difficult given that primary is where the action is. But that is going to change. The demand for the current welter of corporate debt being issued is undimmed with deals 3x – 5x oversubscribed almost as a rule, and final pricing 15bp – 25bp tighter versus reoffer (also as a rule). Borrowers are going longer maturity-wise as rates fall, and investors are chasing duration in order to try and get more juice on board.

Next up, we should look for an almighty squeeze in secondary.

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