3rd February 2017

BoE eats humble pie

FTSE 100
7,142, +34
11,627, -32
S&P 500
x,xxx, +-xx
iTraxx Main
72bp, -1.5bp
iTraxx X-Over Index
296bp, -6bp
10 Yr Bund
0.43%, -4bp
iBoxx Corp IG
B+134.25bp, +0.5bp 
iBoxx Corp HY Index
B+377bp, +3bp
10 Yr US T-Bond
2.48%, unchanged

Credit played the Trump trade…

The poor level of corporate bond issuance in Europe since the inauguration last month suggests that issuers were front-running the event. Those that didn’t are waiting… for something. But little has changed to suggest deals can’t get away with ease.

There is either a lack of desperation to get funded, a view that funding costs will improve (secondary is firming and rates might go lower), or they’re just advised to wait in order to elicit the best possible funding levels and receptivity to a transaction. Or all three.

We’re of the view that it is always best to get deals away when you can and not when you need to. And we don’t buy into the earnings blackout period curtailing issuance because we’ve had February and March in previous years at times each delivering €30-40bn of IG non-financial issuance.

Mexico’s Sigma Alimentos: IG Non-financials deal

We had a couple of deals yesterday to open the account for February in IG non-financials. Mexican food processing and distribution group Sigma Alimentos and Norwegian airports group Avinor printed €1.1bn between them, and managed to squeeze the initial price talk by 15-20bp in the process. At least one dynamic is unchanged! The other deal of note was the €1bn, 10-year maturity T2 deal from BBVA.

In all, we have to think that the corporate bond market has come through the last couple of weeks fairly unscathed. Monthly returns in euro and sterling IG credit haven’t been great (well, they’ve been negative), but from a spread perspective the market is firm, albeit amid little meaningful activity. The action has been elsewhere – the level of the US dollar, government bond market yields/direction and equities amid the evolving new geopolitical scene we are having to make sense of.

But there’s much elsewhere to concern…

The Bank of England’s rate decision announcement passed us by (they kept everything unchanged). They did upgrade their growth forecasts from 1.4% to a whopping 2% in 2017, while inflation is expected to peak at 2.8% in 2017.

Mark Carney announced upgrades on previously dire economic growth forecasts

The base rate stays at 0.25%, the corporate bond purchase programme still targets £10bn of purchases and the Gilt buying quantitative easing still targets £435bn of purchases. It’s not lost on us that this is the second major growth upgrade since the Brexit vote.

The BoE also announced that their corporate bond purchases were up at £6.1bn after just five months of an 18-month programme. They will finish early but the next six months of lifts at least will help spreads stay well-anchored.

Sterling came under pressure on the back of it all, weakening 1.0% versus both the dollar and the euro. Gilts also got a better bid behind them, with yields in the 10-year, for example, dropping 7bp in the session to 1.38%.

In the Eurozone, the inflation numbers continued to rise, with producer prices rising 1.8% at the end of 2016 – and to a 4-year high at that. A surprising rise in Spanish unemployment in January served as a timely reminder that despite rising growth and inflation, there is much susceptibility to the Eurozone’s recovery. This could be one of the reasons why government bond yields (and here we mean Bunds) haven’t gone to the moon as a safe-haven bid is still supported in many quarters. The 10-year Bund yield was lower at 0.43% (-4bp).

Mind, yields in Bunds have generally risen this year, but the issues are elsewhere. French government bonds are underperforming on the back of the election shenanigans where Fillon – a former front-runner for President – may well exit the race early as his office is engulfed in potential scandal. Macron and Le Pen are the current front-runners in the final early May run-off.

Italian BTPs have also been a notable underperformer amid jitters around the country’s beleaguered banking system and the forthcoming elections which could be held by the end of the summer. Italian debt had a decent session yesterday with BTPs in 10-years yields down at 2.23% (-9bp).

No doubt we will start fretting about September’s German election in due course.

Credit sees out a quiet week

The good government bond rally in yesterday’s session will help returns (small mercies but we’ll take what we can), while the secondary corporate bond market has endured another limited week. Other than that, we are going to close out the week with there being only small moves in spreads and little to worry about in today’s session.

Yesterday, IG spreads edged wider, with the Markit iBoxx index at B+134.25bp (+0.25bp) which is also 0.5bp wider for the week as a whole, so far. Sterling IG valuations also saw a small weakness with the index up around 0.5bp yesterday, but 2.5bp for the week so far. Returns have perked up for both markets however as the underlying has rallied.

In high yield, we also edged a little wider, the cash iBoxx index at B+377bp (+3bp) and 4bp wider in the week – which could easily be reversed into a risk-on session. These are small moves amid the lightest of trading volumes.

For once, the iTraxx indices tightened (it’s been a week!) and outperformed cash with Main lower at 72bp (-1.5bp) and X-Over at 296bp (-6bp).

That’s it; Have a good day and weekend. Back again on Monday.

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.