7th March 2018

Comfortably numb

iTraxx Main

52.8bp, +0.5bp

iTraxx X-Over

263.3bp, +1.8bp

10 Yr Bund

0.66%, unchanged

iBoxx Corp IG

B+93.1bp, unchanged

iBoxx Corp HY

B+310bp, unchanged

10 Yr US T-Bond

2.85%, -2.5

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=”10″], [wp_live_scraper id=”11″]

Goldilocks is coming back…

Disarray on the US political scene as Trump’s most senior economic advisor quit his post following his dismay at the impending import tariffs set the tone for the session. The dollar weakened, equities pushed lower, Treasuries received a moderate bid and credit was ‘probably’ better offered for choice. All that lasted for about the smallest of moments as we opened for business.

And then we settled and the losses declined before European risk assets pushed on into positive territory. For now, the resignation is just another to add to the long line of departures that the current regime has had to deal with, and we dare say that the markets expect more. So we have become ‘numbed’ to it to a large extent. There’s no panic in the credit market.

Whether the import tariff situation is the beginning of something much bigger than we could ever consider (or just another event-risk situation that excess liquidity in the system will manage to paper over) will likely come out in the wash over the coming weeks. For sure, the EU is readying retaliatory action, so we might just be on to something more sinister which is going to impact what otherwise was looking like being a very good year on macro.

Global growth is going to be affected – if it isn’t already starting to be. Domestic and foreign direct investment is going to become more cautious/circumspect (we already have examples of it in the last week), business and consumer confidence will likely wane (already seeing sign of this too), while jittery markets won’t help anyone and that means policy makers will possibly have to rein in their normalisation ambitions.

That might not be great news for equities, although lower rates (or stable at ones at around these levels) will help. But it could be good for fixed income as we get back to a Goldilocks-like economic growth dynamic. Sort of like 2016/H1 2017. That means credit, or rather the corporate bond market per se, will be given a bit more support – as if it needs it. We might not push on much tighter, but event-risk which harms macro recovery and dampens inflation expectations is going to underpin our market.

We would therefore think that IG credit ought to resume a modest tightening trend and we should see a better bid emerge again for high beta financial credit vis-a-vis the contingent convertible market. A week can be a long time in the corporate bond market!

Primary’s last hurrah for the week?

€500m deal for REIT Gecina

Another decent level of flow greeted us on Wednesday in what will likely be the last of it for this week, ahead of the ECB (Thursday) and then US non-farms (Friday). Software group SAP SE would have grabbed most of the attention as the German group issued €1.5bn split equally between 3 tranches. They printed a 3-year floater at Euribor+10bp (-10bp versus IPT), an 8-year fixed tranche at midswaps+15bp (also around 10bp inside the opening guidance) and a 12-year deal at midswaps+23bp (around -12bp versus IPT). Order books were at around €8bn. We also had Chemchina take €1.2bn in a long 4-year maturity priced at midswaps+150bp (-15bp versus IPT), off books of €2bn. That takes the total so far this month to a touch over €5bn in IG non-financial issuance.

The REIT sector was busy again, with deals from Gecina in the form of a €500m effort in a 10-year maturity at midswaps+63bp (-12bp versus IPT) and where books were a little under €800m.

In the high yield market, we had Arrow Global issue and upsized  €285m in a 8NC2 floater at Euribor+375bp (at the wide end of the guidance), as well as a downsized £100m in a tap of the 2024 issue. And it’s €1.2bn of issuance for the month so far of high yield corporate debt.

Not to be left out, the senior banking sector had Bank of Montreal issue €500m in a 4-year floater format at Euribor+23bp. Finally, we had a couple of deal priced in the sterling market with Hiscox (£275m) and DXC Technology (for £250m) paying a visit.

A comedy of errors?

Elsewhere, the US trade deficit widened to its highest level in almost 10 years in January to a little under $57bn with $36bn of it with China. A red rag to a bull? Oh yes, President Trump will be tweeting about it all soon enough. In a boost to Trump’s proposed tariffs, US Steel announced planned investment and the restarting of its Illinois facility. This saga has much to run, with the EU now sharpening its pencil as it added orange juice and peanut butter and the like to its list of US imports which might face tariffs!

European equities maintained an upbeat mood through the session and managed to close in the black – the Dax up by 1% – as their directional bias for once decoupled from US markets. The Dow and S&P were firmly in the red (0.8 – 1.3% lower) for most of the session before a late comeback had them close mixed.

In rates, the session petered out with the market barely changed to better bid, leaving the 10-year Bund yield at 0.66% (unchanged) and the equivalent US Treasury at 0.85% (-2.5bp) – the latter yield moving lower as the bid for Treasuries increased as equities dropped some more. The 10-year Gilt yield was lower, at 1.49% (-3bp), probably with some support coming from renewed headline risks around the Brexit debate.

As for credit, the iTraxx indices took a slightly wary stance, and edged higher with Main at 52.8bp (+0.5bp) at the close while X-Over was up 1.8bp at 263.3bp. The cash market in IG closed unchanged with the iBoxx index at B+93.1bp – as did the HY market at B+310bp (iBoxx index).

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.