17th July 2019

Corporate bond market QE – please no!

iTraxx Main

50.2bp, +0.4bp

iTraxx X-Over

248.7bp, +2.8bp

🇩🇪 10 Yr Bund

-0.29%, -4bp

iBoxx Corp IG

B+116.2bp, +0.7bp

iBoxx Corp HY

B+412bp, +7bp

🇺🇸 10 Yr US T-Bond

2.05%, -7bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

QE ‘fix’ unwelcome…

The corporate bond market is anything but broken. Issuers are easily funding at or close to their lowest ever levels. Investors are hugely receptive of deals – across the ratings spectrum, and by a large margin. Demand for new corporate debt is holding at oversubscriptions typically in the 3x – 7x area. In IG non-financials, the annual run rate is close to a record level, senior offerings are rising and high yield borrowers are also being funded, rather easily.

We would wonder what the objective might be if the ECB get involved again. After all, there is little or no need to reduce borrowers’ funding costs by giving the markets a nudge. There’s plenty of demand from investors with (iBoxx index) yields at record low levels and spreads in some markets heading that way too, again.

It appears in credit as if we have established the set-up for the summer weeks. We’re going to grind a little better in spread terms, returns are likely going to hold up because rates having had their wobbly now appear to have a fresh footing while primary has already slowed. We should come out the other side (at the end of August) with IG spreads heading inexorably towards that B+100bp mark (iBoxx index, currently at B+115bp, -48bp year to date), and total return investors sitting on returns of 10%+ for AT1, in the 8% area for HY and around 6% in IG.

The deals at the moment are hitting the screens with little or no competition but highlighting the grab for yield include Monte Dei Paschi’s T2 offering (coupon of 10.5%, it paid 5.375% in Jan 2018) and after an 18-month absence, Greece’s new administration was back for €2.5bn in a 7-year (with just a 1.9% yield).

They’re the kind of deals which we might expect to get away amid much lighter investor participation, although several senior bank issues have also been printed this week. Equities seem to be treading water amid a mixed bag of results from the opening banking sector results with misses (JP Morgan), beats (Goldman) and margin erosion (Wells Fargo) all in the mixer.

Macro is hit and miss too. Chinese GDP in Q2 improved by 6.2% in line with expectations – although a 27-year low, but clearly highlighting pressures on the economy. The German Zew survey of market experts fell further in July as geopolitical tensions remain high (Gulf, US-China, Brexit). In the US, no such issues, with retail sales in June beating expectations just as manufacturing in the NY area rebounded to a 2-year high.

A Fed rate cut is priced in. A flurry of activity is anticipated by the ECB at some stage with markets thinking in terms of a rate cut and/or more from the ECB. One can argue the relative merits of what more QE will achieve here.

It is quite clear that the credit ‘markets’ are not broken, and further QE would be fruitless in trying to get the wheels oil for easier borrower access. The corporate bond market should not be seen as fair game as part of any central bank QE programme. For sure, if the central bank has a tilt at corporate bonds again, investor frustrations are going to escalate. After all, we really don’t need another bout of buying from the ECB muscling in on a market which is functioning very well at the moment, as already highlighted.

We didn’t need the QE corporate bond purchases in 2016, and we certainly don’t need them meddling now. They will only exacerbate secondary market illiquidity further and force investors to hold even more risky assets as they head back down the credit curve in any crowding out move.

Uneasy calm

The markets have been trading without any serious conviction this week. It feels like an uneasy calm has transcended the markets. Across the board rates, credit and equities are stuck in tight ranges, reflecting a lack of investor participation as the holiday season begins to make its mark.

It’s been a week, but Italgas became the first borrower in the IG non-financial market since Westlake to get a deal on the screens. The Italian borrower issued an increased €600m in a long 10-year at midswaps+78bp. The €2.25bn saw the final pricing 27bp inside the opening guidance.

That deal took the monthly total for IG non-financial issuance to €9.4bn which is disappointing given the level of deal flow before it this year and we might have expected another €5bn – €6bn on top of that level before we slow right down into the holiday period. That now looks unachievable as we are only likely to get opportunistic offerings from now on.

In the high yield market, we had three tranches from each of Domestic & General and Loxam. The former took a combined £455m in a two-tranche sterling effort, along with €200m in a 7NC1 euro-denominated deal at Euribor+500. Loxam was due to price three tranches in euros, in 5.5NC2, 7NC3 and 8NC3 structures to yield between 3.25% and 6% across them, for total proceeds of around €1.4bn.

Elsewhere, equities were in the red amid a nervous eye on the US earnings season. BofA beat expectations on tight cost controls, while BNY Mellon succumbed to the more difficult market conditions (yield curve, low volatility and dollar strength). Market newsflow elsewhere was quite light with sterling under some pressure again as no-deal Brexit fears heighten.

Gilts were better bid on those fears allied with a sharp fall in London house prices in May heaping pressure for some easing activity on the BoE. The 10-year Gilt yield dropped 5bp to 0.77%, we had the equivalent maturity Bund yield drop to -0.29% (-4bp) while the 10-year US Treasury yield dropped back to 2.05% (-7bp).

In credit, the synthetic indices edged a little higher with Main 0.4bp wider at 50.2bp and X-Over 2.8bp higher at 248.7bp.

As for cash, we edged wider for choice with the iBoxx IG cash index up at B+116.2bp (+0.7bp) but the index yield dropped to a record equalling low of just 0.65%. At just past the half way stage for the month, total returns are up at 0.5% for July and at 6% for the year to date. The same minimal weakness was seen in the CoCo and high yield markets, amid the smallest levels of activity. The high yield index was 7bp higher at the close, at B+412bp (+7bp).

Given the lower levels of market activity, we will be back next Tuesday. Have a good day.

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.