7th February 2018

What a difference a day makes

iTraxx Main

47.5bp, -1.9bp

iTraxx X-Over

250.2bp, -5.4bp

10 Yr Bund

0.75%, +4bp

iBoxx Corp IG

B+83.4bp, -1.8bp

iBoxx Corp HY

B+284.5bp, -6.5bp

10 Yr US T-Bond

2.84%, +8bp

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″]

Normal business resumes…

So that was it? Admittedly we had a fairly heavy fall in stocks after a mega bull-run. Some cowered but most seemed to stay fairly calm through the declines. The economy will bail us out, for a change. So on we go, trying to find our feet around how rising interest rates might impact risk assets.

If we learn anything from this wobble it is that we ought not get carried away by the ‘low rates forever’ argument keeping prices underpinned, and/or that it is going to be a one-way journey ad infinitum. There will be another big sell-off, and it might the ‘the one’.

There will be a cyclical downturn – but not this year. The default rate will rise, but not until we’re well into the next cyclical downturn (2020?) and so on. For now though, calm is restored and the equity markets are stabilising while we reflect on the past week’s events.

And we think that the path of least resistance is for the spread tightening trend to resume, while equities go higher (hopefully in more measured fashion) and market rates stabilise at these levels given that hawkish central bank commentary and policy might be reined in.

The markets are good at – and have a habit of, recovering their poise quickly. Investors have such short memories, or has the market taught them to be that way?! This time, the financial system is still awash with copious levels of liquidity and these new, perhaps better, entry levels are going to have that cash put to work as soon as reasonably possible.

In credit, few panicked when equities dropped and volatility reached multi-year highs. As is usual, the bid side went missing or was prohibitively defensive should any investor have looked to reduce any risk in extreme market conditions (never usually a good idea anyway). However, with the market tone improved, borrowers were out in force and we even had a Russian bank in the market (in dollars).

With the primary market fairly effusive – and demand rock solid, rest assured the secondary market was better too, and looking to recoup some or even all of the moderate weakness seen in the past few sessions.

Primary gives some focus

We had some primary activity but in the main, it was difficult to get excited about it. Well, the Novartis deal anyway. The borrower was in the market with a 3-tranche offering for a combined €2.25bn. However, it was slim pickings in terms of spread. The 5.5-year tranche was priced at midswaps+2bp, the 12.5-year just midswaps+10bp and the 20.5-year maturity deal just midswaps+20bp.

The books were just shy of €7bn and the longer deals both 20bp inside the opening talk, the shorter some 13bp. So, good demand for a high quality corporate borrower (low double-A rated) – and somewhere to park some cash.

The other non-financial IG corporate borrower was McKesson, which printed €250m in a 2-year floater format at Euribor+13bp (-12bp versus IPT) as well as a €500m effort in a long 8-year maturity at midswaps+67bp (-18bp versus the opening guidance) on combined books at over €3bn.

The total for the month after these issues rises to €7.5bn and to €26.9bn for the year so far. The other deal in the session was from United Utilities Water in sterling for £300m in a 7-year maturity priced at Gilts+77bp.

In senior debt, ING was borrowing through its holding company with a 7 year deal for €1bn priced at midswaps+42bp and is the first senior offering this month – following on from the €21bn issued in January.

Pavlovian response

A classical conditioning of the market it might be, but we did see out the big wobble in double-quick time. There was a more robust response from equity markets in Wednesday’s session versus the one before it which had displayed all the hallmarks of a market trying to find its feet. That enabled us to record stock market gains in Europe, where the FTSE outperformed as it rose 1.9% with Eurozone markets up to 1.6% higher. US stocks were up to 1.3% higher depending on the index before they succumbed to weakness to fade the gains – all in the final minutes, and close up to 0.5% lower!

Rate markets were better offered and were edging back up to the levels seen before the equity sell-off, in an almost ‘it never happened’ surrealism. The 10-year US Treasury jumped to a yield of 2.84% (+8bp) – not helped by the weak demand for a new 10-year auction, while the same maturity Bund closed up at a yield of 0.75% (+4bp) and the 10-year Gilt yield rose 3bp to 1.55%.

The rally has been extended to Bitcoin, as the price per coin rose to over $8,000. The only loser at the moment – on rampant US production, is oil, with Brent trading off a $65-handle versus close on $70 per barrel less than two weeks ago.

In synthetic credit, the iTraxx indices effectively reversed the previous day’s losses, leaving Main 1.9bp lower at 47.5bp and X-Over 5.4bp lower at 250.2bp.

As for cash, we also had a better session of it as we might as well have expected. Focus was on primary, liquidity in secondary was poor as ever, but the better tone left the Street little choice but to mark prices higher. The corresponding spread movement saw the Market iBoxx IG cash index squeeze tighter and left at B+83.4bp (-1.8bp).

As for the high yield market, we also squeezed and the iBoxx index was left at 284.5bp (-6.5bp), managing to regain over half of the previous session’s weakness. Even the Algeco Scotsman deal was trading up (pricing postponed on Friday to Tuesday), obviously helped by the better market tone – and the improved terms for investors!

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.