10th April 2019

May ‘drags’ on, ECB ‘Draghis’ on

iTraxx Main

60.1bp, -1bp

iTraxx X-Over

254.8bp, -4bp

🇩🇪 10 Yr Bund

-0.03%, -2.5bp

iBoxx Corp IG

B+134bp, -0.5bp

iBoxx Corp HY

B+412bp, unchanged

🇺🇸 10 Yr US T-Bond

2.48%, -2bp

🇬🇧 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″]

Path of least resistance and all that…

Everyone is waiting for something to happen. And that includes the ECB by the looks of it, before it feels that it can act more decisively. The two main developing issues which have us gripped, though, are the Brexit process and the US/China trade tariff talks. There’s seemingly little progress or concrete news on either, although the former will likely throw up something imminently. In the meantime, markets are effectively treading water as they wait for a nudge to allow for some sustained direction.

Credit, though, has done well to trudge through the tedium which might be besetting other markets, and continues to edge tighter in spread terms, while primary is still throwing up a decent amount of deals across all sectors of the corporate bond market. It seems that borrowers are being as constructive as they can in pulling down fresh funding while investors have been more than willing to get them funded as they look to use up some of the heavy levels of sidelined cash.

That’s not to say that we have little to think about – even in addition to the aforementioned issues. Trump had been busy again throwing his toys out of the pram as his administration threatens fresh tariffs on $11bn of European goods, which no doubt will be met by tit-for-tat by the EU as previously.

Meanwhile, the IMF’s downgrade of global economic growth expectations for 2019 (where the agency expects the global economy to grow by 3.3% in 2019) – down from 3.7% previously. The reasons are obvious and have been fleshed out many times (trade tensions, Brexit, potential failure of recent Chinese stimulus etc).

And, to think, the S&P500 is less than just 2% away from surpassing its all-time record high which was set last year. Rates might have sold off lately and yields backed-up, but that isn’t going to last and we still look for the 10-year bund to see out that record low -0.13% soon enough (currently at 0.00%), for example. In credit, euro-denominated IG returns exceed 3.3% while the high yield and AT1 markets (iBoxx index) are cosying up to returns either side of 6% year to date.

Primary markets poised

Primary credit had a quieter session on Wednesday as we might have expected given the ECB gathering, but we did have the odd deal pass through. That was mainly supra/sovereign-owned entities in the case of Bank of China and BNG Bank.

But the week has been not too shabby from the corporate issuance sense. We’ve had four borrowers lift €2.1bn in the IG non-financial market with LG Chem, Diageo, Coca-Cola and Glencore in the market and taking the year to date supply total to €94.5bn. Now that the monthly ECB meeting is out of the way, it must be reasonable to expect that issuance can take off again and take us past the  €100bn sometime well before the Easter break and close to the €110bn mark come the end of April.

Similarly, we have some HY issuance although the interest in the deals this week would predominately have been from IG investors. Ineos’ €770m and Telecom Italia’s €1bn have boosted the high yield issuance numbers, while Orano’s €750m also likely will have elicited much IG investor interest.

These borrowers are at the top end of the high yield rating category, but the juicier yields offered would have made for the investor good demand. ItalMatch finally priced it’s Sept 2024 tap for €200m at €99.75. We’re up at €16bn year to date now for HY rated supply.

The deal of note in the session came from Yorkshire BS which printed £275m in a 6NC5 senior non-preferred structure at G+215bp, with order books above €1.9bn.

Credit’s wheels well-oiled

The ECB was the centre of attention in Wednesday’s session, and amongst other indicators they would have been reflecting on recent industrial weakness in the region, particularly across Germany, as well as the news on Tuesday that Eurozone loan growth was flat (0%) in the previous quarter – after growing at or more than 10% in the previous quarters since 2015.

No change: The ECB

The ECB kept it all unchanged, as we might have expected. That is, the deposit rate was left at -0.4%, the main refinancing rate at 0% and they’re on hold for the official borrowing costs for the region until 2020.

Draghi struck a sombre tone in his press conference, highlighting the persistence of uncertainties weighing on the Eurozone’s economy. The risks to the economy were tilted to the downside he pointed out, in a quite laborious meeting offering very little that we didn’t already know. Nevertheless, monetary policy loosening is coming, and likely very soon we would think.

The euro weakened a little as a result of Draghi’s assessment which gave a small, additional push to equities (Dax up 0.5% and the outperformer). In rates, we had a big move as judged by the recent ones we have seen, and the 10-year benchmark Bund yield declined by 2.5bp to -0.03%.

US Treasuries also got a bit of a bid behind them (10-year 2.48%, -2bp) as core CPI came in at 2.0% in March versus 2.1% in March, suggesting that the economy is not blowing too hot or too cold. And the Fed isn’t going to move for the foreseeable future.

Brexit ‘stuff’ and some good UK GDP data for the three months to end February (better than expected) kept Gilts close to unchanged to yield 1.09% (-1bp, 10-year).

So what to do? Look to the corporate bond market! Rates are not going higher – but staying low, and most likely going lower in our view. The ECB isn’t going to throw the kitchen sink at it as judged by yet another ‘nothing’ press conference from the central bank.

But they’re preparing us… for something.

So corporate bonds – aided by a low default rate and low rating transmission risks – are the place to be to get a little bit of extra yield while preserving capital. Needless to say, a higher beta portfolio positioning is also advisable.

In the session, the secondary corporate cash market was effectively still treading water but a touch better bid, for choice. In all, it left the iBoxx IG cash index at B+134bp (-0.5bp) and the high yield index at B+412bp (unchanged).

And finally, the iTraxx indices closed with Main at 60.1bp (-1bp) and X-Over 4bp lower at 254.8bp.

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.