5th October 2017

Cheer up!

iTraxx Main

55.4bp, -1.4bp

iTraxx X-Over

244.5bp, -4.2bp

10 Yr Bund

0.45%, unchanged

iBoxx Corp IG

B+107.2bp, -0.5bp

iBoxx Corp HY

B+278.5bp, -2bp

10 Yr US T-Bond

2.35%, +2bp

FTSE 100

7,506, +39


12,968, -3

S&P 500

2,552.07, +14.33

It shouldn’t do, but….

It feels so dull! And it has been like this for weeks. We’ve sailed through several ‘banana skin’-like event risk episodes. We’ve had closing record high an umpteen times in US equities. Other stock markets are posting recent and/or record highs, too. The US economy is doing well. The Eurozone seems to have laid some solid foundations for some kind of sustainable, albeit slow, recovery.

Rate markets have reacted but are not necessarily wiping out returns in all fixed income asset classes (credit, that is). And the corporate bond market is stable, closing-in on record tight spreads without ratcheting tighter in any meaningful way.

Supply, though, is coming in fits and starts. We hope each session will bring a flood of deals. But it doesn’t quite happen. We know the pipeline is rammed – especially in the high yield market. But we need issuance to keep investors occupied because without it the market grinds to a halt, given secondary turnover is non-existent. And then we are in danger of overthinking it all.

And it feels dull. Because US stocks setting daily highs as they inch higher in most sessions leave markets feeling nervous because there is no decisive push higher. It’s all occurring in a very tentative fashion. Rate markets haven’t reacted in all their glory to higher policy rates which are coming in the US, or to the upcoming tapering announcement by the ECB. The economy is doing relatively well from a growth perspective, but inflation isn’t picking up to levels that policy markets would like. These markets, if they remain as is, are great for corporate bonds. But investors here are nervous because of rotation risk, or higher rates eating returns. They needn’t be. Because money is still pouring into IG funds.

In conclusion, we could think that the central banks have succeeded. They have managed to “push the can” so far down the road that we have forgotten what it looks like and if it’s even there! Eventually we will catch up with it and no doubt it will come as a surprise when we do.

Drip, drip, drip… in primary markets

Telecom Italia: €1.25bn deal

It was yet another very light session on the primary front with just a couple of IG borrowers chancing their arm. And it’s not been a great start to the month. At least the deals came with a bit of spread in them, even if around 20bp was squeezed out of the initial guidance levels, which seems to be the normal state of affairs for primary market pricing dynamics these days. In a sense, it is a borrower’s market given the lack of meaty issuance and non-competing deals. There was nothing in financials, senior nor subordinated.

Non-financials issuance in IG had a telecoms flavour about it with borrowers from Italy and France in the market. Telecom Italia issued a 10-year maturity deal for €1.25bn at midswaps+157bp which was 23bp inside the opening pricing gambit. The other deal came from French group Iliad which lifted €650m in a 7-year maturity priced at midswaps+110bp. The day’s two prints take the weekly issuance to a paltry €3.85bn and we’re not anticipating anything in Friday’s session given the afternoon US non-farms payroll report, which typically curtails any meaningful activity.

In the high yield market, subscription TV provider Altice Finco priced €500m in a 10.25NC5 senior note structure to yield 4.75% to become only the second HY print this week so far (after BayWa’s €300m on Wednesday). There should be a few deals priced in Friday’s session.

Anything BUT dull for US equities

European equities were trading around flat throughout the session, with the FTSE probably the pick of the bunch and likely benefitting from weakness in sterling. It was up just 0.4%, sterling weakened and Gilt yields backed off earlier lows. And all because the word is that the BoE might not be raising rates in November given Theresa May’s calamitous conference speech.

The main news flow in the session was still focused on Catalonia with Sabadell and Caixabank threatening to move their headquarters out of the region. The possibility that there was some disagreement amid the Catalonian ranks about calling independence as soon as next week, we had a recovery in Spanish debt. The 10-year Bono ended the day offering a yield of 1.70% (-7bp). Spanish stocks were up 2.5% as they regained their exposure following heavy losses the previous day.

There was no stopping US equities, again higher by around 0.5% and obviously closing at new record highs. Elsewhere, in rate markets, 10-year Gilt yields were eventually unchanged at 1.38%, the equivalent maturity Bund was yielding 0.45% (unchanged) while Club Med continued to benefit from that Spanish recovery, Italian BTPs down at 2.20% (-5bp) in yield for example.

The iTraxx indices clawed back some – a little bit more in the case of X-Over – of Wednesday’s weakness, with Main lower at 55.4bp (-1.4bp) and X-Over left at 244.5bp (-4.2bp). In the cash market, we were met with yet another lacklustre session but the better tone managed to see us only edge tighter with the Markit iBoxx IG index at B+107.2bp (-0.5bp).

A look at the sterling market has the iBoxx index at G+131.7bp which is 2.5bp tighter this week although some of that would have come from the month-end index change. Still, the index was tighter by 0.6bp in Thursday’s session and might have something to do with economic weakness, Tory party woes and the increasing view that rates aren’t going higher – this year.

As for the high yield market, it was clearly better bid and spreads tighter on the index had it at B+278.5bp (-2bp) and is now just 2bp off the record low we saw in August. On to non-farms.

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.