26th July 2017

Central banks’ self-flagellation

iTraxx Main

51.2bp, -0.8bp

iTraxx X-Over

233.4bp, -2.5bp

10 Yr Bund

0.55%, -2bp

iBoxx Corp IG

B+104bp, unchanged

iBoxx Corp HY

B+283.4bp, -1bp

10 Yr US T-Bond

2.29%, -4bp

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″]

…leaves gushing corporate bond markets…

The credit market this year has been a clear success story. Even the most bullish of predictions have been exceeded for this market. The high yield market has spreads deep in record territory, while the IG market is closing in on the record tights as recorded by the broad market iBoxx index measure. Demand has held up very well.

The new issue pricing game has been bolstered by it, but we might be detecting the first vestiges of some change here. The ECB has lifted over €100bn of non-financial IG debt (15% of the eligible market) – and has kept the party going. Supply, though, hasn’t quite broken away from monthly averages we have seen and we question whether the ECB has been successful in further disintermediating the corporate funding process. It hasn’t.

There is some evidence now that we might be in the throes of a sustainable recovery across the Eurozone, albeit off low levels and at low levels. That positive dynamic is probably already feeding through into improving credit metrics, investor confidence in corporate bonds – and offering another reason for spreads to go tighter. Admittedly, it all looks stretched but with the ECB not likely to taper asset purchases until next year, we are going to be heading tighter from a spread perspective.

For the year to date, IG spreads are 30bp tighter at B+104bp and have zoomed past anything we had expected when we started the year. They have tightened more than they did last year (-20bp in 2016).

In high yield, the cash iBoxx index shows that spreads are 130bp tighter so far this year – and at record lows. No one expected this level of performance. Supply has been at higher than expected levels, too. There has been some pushback on deals by investors as well.

However, there has been no stopping the demand for higher yielding assets. We are now looking in the context of a B+250bp like axis for this index by the time the year is out. That must surely come if the economic growth story continues to play out as it is while this asset class is immune from rising rates in the early stages of any cyclical upswing.

All this has been made possible because of the collapse in policy rates, the resultant QE and easy policy for nigh on ten years now – resulting from the financial crisis. There is little need to be afraid – The unwind isn’t likely coming anytime soon.

We struggle to think of a credible scenario where we actually get one. We might see some spread weakness at times – that is only to be expected. But a wholesale rush for the exits on some catastrophic financial markets event is a no-no. Complacent? No – Realistic, more like.

Fed meetings makes for a dull session

The FOMC’s handy work was all over the market in Wednesday’s session. Basically, we ground to a halt. There was a better feel to the markets, however, likely derived from that record close the previous session on the S&P. We’re now thinking that the market will be in holiday mode for the next five weeks with only the simplest of transactions executed into quieter climes (SSA-like deals).

The focus for fixed income investors for the next few sessions will be for everything to hold in a defined range so as to not spoil the slightly positive total returns we have garnered this month. June’s performance was busted following that late rate sell-off, and while Tuesday’s rate market weakness might have frayed some nerves, credit markets are still in positive return territory for this month’s performance.

The earnings season continues to suggest that we’re info a decent set of results for the period gone by, while the forward-looking guidances are also suggestive of a decent Q3 (& possibly Q4), too. Putting that all together with a dovish-like outlook from the various central banks, then risk assets have more room to rally.

Time for that sunshine break

So we’re almost done and dusted until September. We don’t look for much to get away for the rest of this week while we wouldn’t be surprised with the odd, quick-fire, opportunistic effort in primary early next week. But we’re close to having had our lot for now.

We closed pre-FOMC with equities in Europe in the black registering up to 0.3% of gains. And all the US indices registered intra-day record highs. Rate markets were close to unchanged, although Gilts outperformed as much as they could as they responded to UK GDP for the second quarter coming in line with expectations, at 0.3%. The 10-year yield was down at 1.23% (-3bp). Bunds in the same maturity were at 0.55% (-2bp) while OATs were unchanged to yield 0.81%.

As suggested above, we expect that spread markets should hold firm and/or grind out some more performance through August. In Wednesday’s session, the cash market tightened a little more amid the poorest of secondary market liquidity and no new deals. Nitrogenmuvek was due to price a EU130m 7NC4 deal. Tuesday’s Greek deal was trading by around 10-11bp.

The IG corporate market had the Markit iBoxx index left at B+104bp, and just a touch better bid for choice. And it was the same in high yield, where the index level dropped to B+283.4bp (-1bp) in a predictably light session.

The iTraxx synthetic indices also moved tighter with Main down at 51.2bp (-0.8bp) and X-Over better offered at 233.4bp, around 2.5bp lower on the day.

The Fed statement was barely changed, with most of it a ‘copy & paste’ effort of the one before. There was a little on the balance sheet reduction which likely brings that process forward. That was easy! On we go through the summer.

We’re moving to a weekly rather than daily format now for this commentary, given the slowdown in market activity, through August. We hope that it doesn’t inconvenience you too much (or at all). Next, we will be back with a full month-end update (supply, performance etc) on Tuesday August 1.

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.