28th February 2018

Corporate bonds: Boring, but dependably so

iTraxx Main

52.4bp, -0.1bp

iTraxx X-Over

264.5bp, +1bp

10 Yr Bund

0.66%, -2bp

iBoxx Corp IG

B+89.4bp, +0.3bp

iBoxx Corp HY

B+305.6bp, +1bp

10 Yr US T-Bond

2.88%, -2bp

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″]

Not bad, not bad at all…

A few have recently been questioning the merits of investing in corporate bonds given a fairly unexciting – and weak – month for the product. But the potential opportunities elsewhere – equities, for example, haven’t exactly covered themselves in glory either. We’re all sitting on negative returns for February (fixed income and equity markets). Market rates have been heading higher on anticipation of higher policy rates (in the US and UK) and that has eroded any upside garnered from tightening spreads in corporate bond markets, leaving total return investors sitting on negative returns in most credit sub-sectors this year. It’s early days, but we are going to be looking at a weak year for performance for credit. Few should be surprised. That’s why there has been no panic selling/exits – nor do we expect that there will be.

For February, the Dax index has lost over 5% and has been running a total return deficit (the Dax is a total return index) for the whole month, even as the economic outlook brightens, impacted likely by the strength of the euro currency. On the other hand credit markets are down by around 0.1% (IG, iBoxx index), 0.07% (CoCo index ) and 0.7% (HY index) for February. That’s not bad in comparison, we would proffer. Obviously, the gains are always more easily possible too given that equities can move higher, sharply, over a given period of time and rescue performance.

However, for the moment, and for the opening quarter so far, the corporate bond market is in decent shape. It’s just not an exciting place to be. The primary market has taken on a massive importance in the corporate bond market in the past decade. Secondary market liquidity has been so poor that we rely on a functioning effusive primary sector more so now than ever before. Unfortunately, the opening couple of months have seen a fairly low level of issuance just as the ECB continues to lift IG non-financial paper, taking down around €10bn of IG debt this year already (gross supply €30bn).

Small wonder some don’t feel too excited right now about the corporate bond market. There’s barely been much by way of meaty deals to get into. But prices haven’t fallen out of bed. Spreads have been fairly resolute. Specific corporate single name event risk has been very limited. The default rate is low and heading lower as economic recovery gathers some pace. But investors are scratching around for something to do. Tedious indeed!

EU commission taking the biscuit

The EU Commission’s draft exit proposal, released on Wednesday, threatens to push the UK government into a position of walking away. The integrity of the UK union is sacrosanct while a hard border between the North and South of Ireland has been dismissed. Pushing Northern Ireland to remain part of the customs union undermines the internal common market and sovereignty of the UK. As Mrs May said in parliament, ‘… no UK Prime Minister could ever agree to it’. The Prime Minister’s latest Brexit speech which is due on Friday, gains greater prominence now.

Safe-havens generally had a better bid about them in the session, but Gilts were outperforming as the 10-year yield dropped 6bp to 1.50% against the 2bp decline in 10-year Bund yields (-0.66%), with US Treasuries yields also off 2bp at 2.89%. Sterling was a little weaker too, against both the euro and the dollar – although there was broad dollar strength for a change, likely on the back of new Fed Chair Jay Powell’s bullish speech to Congress overnight.

Primary ends with a FIG flurry, again

IG non-financial issuance drew a blank again in the session, leaving the monthly total at a paltry €10.9bn – and the lowest February monthly total for many years. Gross issuance for the year so far from IG non-financial corporates is at €30bn, mostly on the back of the good January. We can now only hope that once we are through the weekend’s election in Italy, that March offers somewhere north of €30bn to get the supply levels closer to the average levels we might get for any normal opening quarter.

In the senior financial space, Societe Generale added to the latest higher issuance seen in this area, as it printed a €1bn senior non-preferred deal in floater format priced at Euribor+45bp. RBS was in the market on Tuesday, Lloyds followed on Wednesday with €750m in a subordinated 10.5NC5.5 Tier 2 deal, priced at midswaps+130bp. Overall, after €21bn of senior bank supply in January, some €11.75bn was issued in February and the €32.75bn issued so far is pretty much in line with historical averages. The other deal came from real estate investment trust group Carmila with an upsized €350m in a 10-year maturity at midswaps+108bp (-17bp versus IPT).

Staying with the REIT sector – but in high yield – Equinix offered €750m through a 6NC2.5 senior note structure, priced finally at 2.875%. The previous HY issue came from Faurecia a week ago, and the monthly total of deals stands at €3.45bn and a very respectable €8.42bn for the year to date.

Not to be left out, the sovereign sector had Slovenia collect €1.25bn in a 3-part tap from its existing 2020 issue (tap size €850m), the 2035s (€250m) and €150m of the 2045 issue.

Snoozy final session

Toys ‘R Us and Maplin retail operations in the UK went into administration, while restaurant chain Prezzo was closing 100 sites and these took most of the financial headlines in the UK. Final US GDP for Q4 2017 was recorded at 2.5% versus an initial reading of 2.6%.

US stocks traded higher at the open but faded the gains and any hopes that European stocks would recover their earlier losses and stay higher was lost. European equity markets closed o.5% lower ensuring that equity markets closed out the month in negative territory performance wise. US equities closed 1% or more lower.

As for credit, the iTraxx indices closed pretty much unchanged with Main at 52.4bp (-0.1bp) and X-over at 264.5bp (+1bp). For the month, Main was almost 10bp higher and X-Over 24bp higher.

We closed with cash markets effectively unchanged in lacklustre end of month final session. The IG index closed at B+89.4bp (+0.3bp) and 6bp wider in February. The sterling corporate market closed a basis point wider on the iBoxx index (B+136bp) – some 17bp wider in the month!

Finally, the high yield market has had a difficult time of it of late, with spreads consistently leaking wider through the month. We eventually ended with the iBoxx index left at B+305.6bp (+1bp) or a massive 35bp weaker in the month. And even with that weakness, few think there is value in there.

Back in March, 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.