8th February 2017

Déjà vu

FTSE 100
7,186, +14
11,549, +40
S&P 500
2,293, unch
iTraxx Main
76bp, +1bp
iTraxx X-Over Index
304bp, +4bp
10 Yr Bund
0.35%, -2bp
iBoxx Corp IG
B+135.8bp, +0.8bp 
iBoxx Corp HY Index
B+378bp, +0.9bp
10 Yr US T-Bond
2.40%, -1bp

Haven’t we heard it before…

So, according to Benoit Couere of the ECB, a Frexit will impoverish France. How does he know!? And didn’t Carney and the Establishment say pretty much the same before the Brexit referendum? Chinese foreign currency reserves dipped below $3trn while German industrial production contracted by a whopping 3% in December.

That latter number would normally be a concern – it is the worst monthly drop in eight years after all, but it comes after a stellar year over all for German industry – and amid booming factory orders in the same month. So bit of a mixture to the news to kick-off the session which left equities higher through the day, while government bonds started better bid, only for them to fade much of the gains.

The German Bund/French OAT spread has become topical as the election season in France gathers pace, but the spread declined a little to 76bp (from 77bp on Monday). We’ve no doubt that there is plenty of volatility in this measure to come as the ebb and flow of news flow/polls emerge through late March and April. AFD, a double-A rated French development agency, pulled a deal yesterday citing volatile market conditions impacting their pricing objectives.

This could be a harbinger of things to come for other French borrowers in trying to get deals away ahead of the French election. After all, there has been weakness on French names, noticeable on the recent senior non-preferreds from domestic  banks.

Hapag-Lloyd: Increased tap was the only non-fins deal

It was another limited session in corporate bonds with secondary quiet and effectively unchanged (a touch wider) and that was with nothing on the screens for non-financials, save for an increased €200m tap from Hapag-Lloyd.

So far – and a week into February – we have had just €1.6bn of IG non-financial issuance from three borrowers and €450m of HY supply from two issues. That paltry sum ought to have elicited a tightening trend in secondary. It hasn’t.

Some might be a little frustrated at the lack of issuance – and we are surprised at it too – but as sure as eggs are eggs, they will come. It might just be that issuers are holding fire for the moment and letting markets settle. This might last for much of this month, before they pull the trigger through a heavy month of March and before the real uncertainty and subsequent volatility sets in into the first round of the French elections.

Anxiety and risk on – it doesn’t make sense…

Wherever one looks, there seems to be a bit of anxiety. But the markets are ignoring it or choosing to look on the bright side through what looks like being a decent earnings season. US stocks are leading the charge with record highs set again during the session, but it was a more mixed day for government bonds.

Stocks generally closed by up to 0.4% higher in the day. For government bonds, Gilt yields headed south, the 10-year at 1.28% (-4bp), the 10-year Bund yield was down at 0.36% (-2bp) who the equivalent OAT yield dropped too – a little, to 1.1%.

It wasn’t risk-on as far as the secondary market was concerned, with spreads edging wider. The Markit iBoxx index for IG credit was up at B+135.8bp (+0.8bp) and that is a little concerning given the lack of supply, while the ECB has been lifting an average of €2bn of debt per week in the last four weeks. As measured by this index, the euro-denominated market for IG credit is 1.5bp wider this year now. Sterling credit went the same way. The index registered a level at G+152.2bp (+1bp in the session) and the index is now flat year-to-date.

The high yield market is faring better. It was just a touch wider in the session, but that is effectively just noise. The index was left at B+378bp (+0.9bp) while returns continue to improve on the back of the support for the front-end of the curve.

And finally, the indices widened with Main up at 76bp (+1bp) and X-Over at 304bp (+4bp).

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.