2nd May 2019

Corporate bonds swinging the bat

iTraxx Main

59.5bp, +1.2bp

iTraxx X-Over

256.0bp, +5.5bp

🇩🇪 10 Yr Bund

0.01%, unchanged

iBoxx Corp IG

B+121.5bp, unchanged

iBoxx Corp HY

B+400.5bp, +3bp

🇺🇸 10 Yr US T-Bond

2.52%, +1bp

🇬🇧 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″]

Flowering thru’ May…

We’re not quite full-on heading into May as we still have the laggards in the corporate earnings season to report – and the all-important non-farms report later – but we’re going to be swinging the bat at some stage next week. In fact, we have wobbled a touch as the Fed giveth with one hand while Powell taketh away with the other. Of course, the markets listened to Powell.

3,000 on the S&P, though, is still the next likely target. Talking of targets, doesn’t B+100bp for the Markit iBoxx IG index (currently at B+121bp, versus B+172bp in Jan) look possible? What about high yield, the index is currently at B+398bp versus B+523bp in Jan – and heading for B+350bp?

Recession? Downturn? With that aforementioned target being bandied around, few are thinking that the US economy is going to nosedive, despite much concern around the sustainability of the current level of growth. The Fed’s Powell isn’t concerned though and suggests that only lower levels of inflation are keeping rate hikes at bay. That’s good in so far as it keeps Trump off his back. Overall, though, the data has been mixed but Chinese and Eurozone data of late has been better than expected and after the good Q1 US GDP print (whatever its make-up) there is possibly a broader sense of optimism.

After the Easter break and with the earnings season disrupting the flow of activity, we had the May Day holiday doing the same this week, but we can get back to business as close usual next Tuesday given the long weekend in the UK. We’re not going to get through too much by way of primary issuance (save for odd HY deals being priced) in the meantime though BP gave us a good start on Thursday, while the secondary market is going to be sidelined with valuations marked depending on how equities perform.

Any confidence from rising stocks is going to translate into tighter spreads and a continued squeeze as investors fret about getting paper on board to help absorb their cash positions. April’s issuance disappointed with barely a deal in the second half of the month in the IG non-financial sector, although the higher number of deals in HY and senior financial debt markets will only have offered scant consolation.

The overall strategy in credit is, therefore, to stay unchanged. We’ve clipped some fantastic performance in the opening 4 months of the year in fixed income markets (IG total returns +3.9%, HY +6.2%, sterling IG +4.0% and Euro-sovereigns +2.5%) and few will be tempted to change course here. The pace of the tightening has accelerated in spread markets through April as well as supply generally waned following the brisk pace through Q1.

Inflows have remained at higher levels and the supply/demand imbalance – if sustained through May and June, could well see spreads significantly tighter come the end of Q2. So staying with current positions and adding higher beta risk when the opportunity arises is going to be the strategic modus operandi for corporate bond investors in May and quite possibly June.

BP opens month’s account for Primary

Primary issuance in May is usually high and makes it for one of the best months of the year. Last year’s lower level of deals saw may come up with just €25bn, but we have had €45bn in the past (May 2016). So it was a good start this time with BP Capital Markets coming a triple-tranche offering taking in both euro and sterling currencies.

BP issued £400m at G+88bp which was 22bp inside the initial talk off a book exceeding £2.4bn. The euro-denominated tranches were for €1.1bn each, and were for 8.5-year and 12-year maturities priced at midswaps+45bp and midswaps+55bp, respectively. With combined books at around €7bn+, the borrower’s final funding levels were 20-25bp lower than the initial guidance.

The total number of deals this year rises to €99.3bn in IG non-financials coming from 123 individual tranches representing an average tranche size of €800m.

In the high yield market, EG Global finally priced its increased €1.64bn equivalent offering. The two euro-denominated tranches took the form of €300m in a 5NC1.5 structure to yield 3.625% (-37.5bp versus IPT) and €670m in a short 6NC2 offering to yield 4.375% (-62.5bp versus IPT). A dollar tranche for $750m was also issued (6NC2, 6.75%).

That’s also a solid start to May in the high yield market and takes us to €21.2bn for the year to date.

Chewing the fat

On the data front, Eurozone manufacturing PMIs showed that the economy was still in contraction albeit at a marginally slower pace through April. The flash estimate was revised higher to 47.9 from 47.8 which, to us, looks like noise – with the Eurozone economy still clearly deep in some sort of decline and malaise.

That said, in the US, Caterpillar made some upbeat noise in a bullish statement on share buybacks and dividends, while lifting sales growth expectations over the next few years. They’re a bellwether group, so its forward indications matter.

BoE: Rates unchanged

In the UK, the BoE kept rates unchanged as expected, but suggested that excess government spending would see inflation rise markedly – and lead to rate rises. Maybe. Nothing’s happening here on the rate front anytime soon, in our view, given the uncertain political (and Brexit) outlook.

Markets didn’t do too much in this opening session after the European May Day break. Equities were flat (Dax) or lower (most other markets) and probably reacting to the previous weakness overnight in the US. As for the US, the markets were in the red as at the time writing and ahead of the non-farms report and that long weekend, with London closed on Monday. The S&P is now 30 points (1%) off its record high set earlier this week.

Rates followed a similar path. The 10-year benchmark Bund yield closed unchanged at 0.01% while the Gilt yield in the same maturity saw yields edge 1bp higher to 1.16%. Likewise, the 10-year Treasury was yielding 2.52% (+1bp).

Credit was also having a quieter time of it, the indices closing with iTraxx Main 1.2bp at 59.5bp and X-Over 5.5bop higher at 256.0bp.

In the cash market, the lacklustre session left index unchanged at B+121.5bp for the IG cash index although the HY index was a touch higher in line with weaker equities at B+400.5bp (+3bp).

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.