19th April 2018

Corporate bonds – The Dead Zone

iTraxx Main

54.5bp, +1.1bp

iTraxx X-Over

275.1bp, +3.4bp

10 Yr Bund

0.60%, +7bp

iBoxx Corp IG

B+103bp, -0.2bp

iBoxx Corp HY

B+311.2bp, +0.3bp

10 Yr US T-Bond

2.91%, +4bp

FTSE 100

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S&P 500

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Zombie bond market…

These are odd times for credit. The corporate bond market should be racing along. It isn’t. Admittedly, there are warnings signs aplenty on macro, rate markets and geopolitics, and while equities generally are holding steady after recovering from their recent wobble, there’s little follow-through into the credit markets. Corporate bond markets are certainly not leading indicators but we’ve stopped following others. Investors can’t be happy to just be ‘ticking over’. Because that’s all what is happening right now. Primary is just ticking over, secondary is just ticking over, fund flows are just ticking over and the days are passing us by. The ECB’s €150bn haul of corporate bonds has probably taken away the heart of the market.

The economic slowdown, next recession, or financial crisis will simply leave our markets in a no-mans-land. Corporate bonds won’t be the worst asset to hold. They might not be the best, but they ought to be near the top of the tree. Spreads will obviously go wider, any panic will be derived from – and depend on, the nature of the event while illiquid secondary markets might result in some exaggerated moves wider. We’ve seen all that before.

But none of that explains why the market just feels like it has been sleepwalking through these opening four months of the year. There is huge disappointment (and let’s not forget much lower fees for bankers) from the relative inactivity in primary. The high yield primary market is a bright spot, but investment grade is failing to deliver. If the doomsayers are right and we are heading into a slowdown with the non-trivial probability that a ‘shock’ event leads to an extended period of volatility in the following months, then the window for getting deals away will become that much harder to get through.

With just one IG deal on Thursday, and just HeidelbergCement and Sydney Airport issuing this week (€2bn between the three of them), we’re left with a poor week of non-financial deals and an opening third of the year running at depressed levels of primary transactions in IG. Before we get too bearish, we could have some blockbuster months – May, June, September, October and even November – in order to rescue the situation, and as it stands, the current run rate will see us over the €200bn line for the year. But that compares with an average in excess of €250bn for the last 5 years – and a level the market is geared up to expect and absorb.

Credit spreads should be materially tighter.

Even if primary is still dealing

The deal flow is still there, but it’s more trickle than anything else. EP Infrastructure finally printed, but there must have been some push back on the deal as the group only got the 6-year offering away, and didn’t go with the 10-year. They lifted €750m off a €1.4bn book, priced 15bp inside the initial guidance at midswaps+110bp. And it was the sole non-financial IG offering in the day, taking the total IG supply for the month to just €12.6bn.

Government of New South Wales owned Ausgrid issued an increased €650m in a long 7-year at midswaps+65bp while Aussie Reit Stockland Trust printed €300m in an 8-year at midswaps+85bp.

Sterling was busy, with some higher yielding deals. Grainger PLC issuing £350m in a 10-year at G+187bp (-18bp versus IPT) and we had Phoenix Group Holdings take £500m oil a PNC10 RT1 structure priced to yield 5.75%. Finally, Virgin Money dealt £350m in an 8NC7 deal at G+208bp.

And last, but not least, the high yield market came up with Gamenet’s €225m floater, the 5NC1 deal priced at Euribor+375bp. We make that €4bn of deals this week in HY (we include Iliad in that total) versus just €2bn in IG non-financials.

Rate and equity markets recoil, oil gains

The oil price continued its relentless climb, with Brent now safely through $74 per barrel. Absent any material news on the macro front, that was the cue for equities to fall, with bourses in the red mostly across the board. The declines were relatively modest in Europe though, up to 0.3% lower. Mind, it was to be expected after some solid gains in the previous several sessions. In the US, equities lost a little more (up to 0.9%), but it didn’t help that Philip Morris took a big hit after an earnings disappointment.

Rate markets also felt much heat. The Gilt market recoiled hard, leaving the 10-year to yield 1.52% (+10bp). Bund yields in the 10-year were up at 0.60% (+7bp) with the 10-year Treasury yielding 2.91% (+4bp).

We had moderate weakness in credit. The first port of call is usually the synthetic indices, and they didn’t disappoint. The cost to ensure credit rose again, the second day in succession, with iTraxx Main higher by 1.1bp to 54.5bp and X-Over by 3.4bp at 275.1bp.

In the cash market, a very quiet session had the market close unchanged. Given the weakness in stocks and the sell-off in government bond markets, that’s encouraging. In IG we had the iBoxx index left at B+103bp (-0.2bp – and that’s the tightest level in a month) amid little turnover/volume. The high yield market also closed unchanged at B+311.2bp (+0.2bp) for the 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.

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