8th May 2018

US out

iTraxx Main

56.7bp, +0.7bp

iTraxx X-Over

275.1bp, +1.4bp

10 Yr Bund

0.56%, +3bp

iBoxx Corp IG

B+106.4bp, -3bp

iBoxx Corp HY

B+326.8bp, -1bp

10 Yr US T-Bond

2.98%, +3bp

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=”15″], [wp_live_scraper id=”16″]

And US and Eurozone rate markets diverge…

The markets have a clear preoccupation with US rates as the incoming data and the latest prepared testimony by Fed Reserve chairman Powell all point to the US being able and willing to absorb a series of rate hikes this year (and beyond). They’re ready for them and, according to Powell, the emerging markets are too!

As a result, there is going to be a clear divergence in policy and market rates between the US and the Eurozone. That will serve to add to dollar strength, we’re going to see a larger differential between say 10-year US/Bund yields (currently at 252bp) and the relative performance of the two corporate bond markets will also diverge (Europe will do better/total returns).

So while the markets ponder and position, and in some cases fret on those US moves, corporate credit in Europe has its own issues. Or lack of them. For IG market participants, the opening four months of the year have been dreadful in terms of deals. We’re into May and the level of issuance shows little sign of picking up in this market.

If we go back to 2014, the year we started to establish a trend of annual volumes exceeding €250bn, the average for the January to end May period was €137bn (2014-2017). With three weeks to go before we close out May, we currently total just under €73bn.

IG Issuance

Let’s just assume that May can be the best month for issuance this year so far – we only need to exceed €26bn after all (but we have only topped €20bn once so far this year, in March), and we manage to hit, say, €30bn. That total would take us to €100bn for the 5 month period but we would still be lower by almost 30% versus the average 0f the 2014-2017 period.

The IG non-financial total for the opening week of May is at €3.4bn. For the aforementioned projection to materialise, we have 3.5 weeks in which to get €26.6bn of issuance away and that includes this week which has been interrupted by a spate of public holidays (with several more to follow). It’s probably not going to happen.

We must be willing/expecting spreads to go tighter as the ECB continues its merry way lifting (now just) €900m of IG debt per week as judged by the last couple of weeks’ data. That would be the normal, classic way the secondary spread market in terms of valuations would play out. Gravity has defied us so far this year.

Trump puts a dampener on activity

The markets spent the day waiting for President Trump’s announcement on the US pulling out of the international nuclear deal on Iran. Prior to any announcement (nothing known at the European close) equities were taking a defensive positioning. But they recovered from the day’s worst levels and were off by up to 0.3% with the Dax the biggest loser albeit in a lacklustre session. The Dax 33-point index drop was just enough to dip it just very slightly back into the red after having hauled its way back into the black – year to date – by the close of Monday’s session.

The Italian political scene was also in focus and we’re potentially looking at a summer of discontent. The prospect of fresh elections – the second such one so soon after the previous poll (unprecedented in post-war Italy), will have many seriously looking at what this might mean. For the Eurozone, Italy is now up there with Hungary as another problem child for the Brussels elite. Stocks took a tumble by up to 2% and were the session’s biggest underperformer, while bond yields rose sharply to 1.84% on the 10-year BTP (+7bp) – also the days worst performing rates market.

Other rate markets also saw some weakness, and yields were generally higher. 10-year benchmark Gilt yields were up at 1.44%(+4bp), the Bund yield rose to 0.56% (+3bp) as the US Treasury clocked off at 2.98% (+3bp).

In credit, there was nothing in primary as we might expect given the Victory in Europe holiday in some jurisdictions. We did get the odd sterling borrower (Longhurst Group/£250m/25-year) and a couple of SSA deals away, but the plain vanilla corporate landscape didn’t offer anything. Wednesday ought to be a different proposition, before Ascension Day on Thursday results in the end of the week’s activity – with many likely missing on Friday, too.

As for cash, a very quiet secondary market closed unchanged with the iBoxx IG cash index left at B+106.4bp (-0.3bp) and the high yield index at 326.8bp (-1bp).

The iTraxx indices closed with little doing, uninterested and closing with Main at 56.7bp (+0.7bp) and X-Over at 275.1bp (+1.4bp). As for Wednesday, we’re sure the markets will be jittery as they contemplate the ramifications of the US withdrawal from the Iranian international agreement. US stocks, as at the time of writing, were around 0.3% lower.

Unfortunately, due to unforeseen circumstances, we will be unable to publish on Thursday. We will be back on Friday.

Have a good day.

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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.