12th April 2017

Drip, drip, drip

FTSE 100
7,366, +17
12,139, -61
S&P 500
2,353, -3
iTraxx Main
76.75bp, +1bp
iTraxx X-Over Index
293.75bp, +5bp
10 Yr Bund
0.20%, -1bp
iBoxx Corp IG
B+131.3bp, +0.5bp 
iBoxx Corp HY Index
B+380bp, +1bp
10 Yr US T-Bond
2.30%, -6bp

Scratching around for clues

Corporate bond market investors will have been surprised by several elements of the market this year. First, valuations. The ECB reported that their 44-week haul of corporate bonds (as lifted through it’s QE programme) had risen to €78bn (€1.8bn per week), accounting for 13% of the eligible market! Spreads since quantitative easing started have tightened by 24bp (iBoxx index), or just a paltry 4bp this year to date. Secondary market activity otherwise is light, volumes low and turnover at rock bottom levels. We should be materially tighter in spreads.

Secondly, one could argue that the corporate bond market has been very resilient and shown little of the pricing volatility which has impacted equities (less so) and government bonds. Equities have been hitting multi-year/record highs, but they have at times shown some volatility – reflecting disappointing macro and stretched forward valuations and more recently, geopolitical tensions. As for government bonds, using the two important proxies – Bunds and Treasuries – they have played out in remarkable 0.20 – 0.50% and 2.30 – 2.60% ranges, respectively. Tension in Syria threatens the lower end of those ranges.

Thirdly, supply. The year to the end of March saw €87bn of of IG non-financial issuance. A very good run rate for the opening 3 months of any year. But April’s contribution has been – and will be – dire. At the half-way stage of the month, with Easter up on us and the French first round of elections to follow, we have just €4.5bn of deals from 7 borrowers. We have a low rate environment, tight spreads, nothing doing in secondary, masses of sidelined cash and demand at elevated levels.

That quintet of factors has been with us for the best part of 7 years. But still, cash-rich borrowers seemingly feel that they can bide their time. It’s good that they’re “cash rich”. We dare say that the sluice gates will re-open in due course, but for now they’re closed despite a burgeoning pipeline.

Classically, spreads in secondary right now should be on a clear tightening trajectory, but few are chasing secondary. Offered side liquidity is scarce and reserved only for the central bank’s QE operations (it would seem).

Slim pickings in primary

€700m deal for Arkema in IG non-financials

The second IG non-financial deal of the week came from Arkema as the chemical group raised €700m at midswaps+93bp in a 10-year maturity, or 17bp inside the opening price guidance. This was followed by an increased €500m effort from Scania in a 3-year floater format, and even here the borrower squeezed the pricing tighter by 15bp versus the opening talk.

For high yield players, the unrated Retting Group raised €110m to become only the third high yield corporate in the market this month. The tally for deals in high yield this month is now up at a still paltry €710m.

Financials were represented by Credit Agricole in a €1bn 5-year senior non-preferred entry in floater format, while the Bank of China lifted €500m also in a floating structure (but in a 3-year maturity).

As caution prevails

It was a risk-off session as geo-political concerns took their toll. The G7 summit ensured the session would play out amid a cautionary perspective, although we still couldn’t dismiss ongoing apprehension around the French elections. The North Korean situation is now also beginning to brew and might have aided safe-havens. Still, equities were sliding into the afternoon session leaving us with a sea of red into the close.

The day initially saw stocks just slightly lower and lacking any impetus, but the US open dragged them all lower with the DAX off around 1% (recovered to -0.50%) as the S&P dropped by almost the same amount. The VIX volatility index hit a 6-month high at almost 16%.

Government bonds were similarly directionless for most of the session, but then they rallied. 10-year OATs were yielding 0.96% (+2bp) into another day of weakness, while Bunds caught a late bid which saw yields edge down to 0.20% (-1bp) before they closed at to yield 0.21% (unchanged). Gilts were also joining in at 1.05% (-2bp).

It was US Treasuries that got the ball rolling, better bid and leaving the yield on the 10-year down at 2.29% (-7bp) at one stage – and out of its hitherto established range (see above). It closed at 2.30%.  We’re only an event away for those yields to break lower – and out of those ranges. Those were small moves in Europe, but telling for OATs as the spread versus Bunds is now firmly back in the 70s, having moved into the low 60s over the previous couple weeks.

That late excitement didn’t disguise another laborious session the secondary market, but again a touch of weakness with corporate credit better offered for choice. The Markit iBoxx index for IG credit was up a touch at B+131.3bp (+0.5bp) while the high yield index was a basis point higher at B+380bp. That’s just a creep wider for both, but the high yield index is now around 12bp off the tights seen this year (-33bp YTD).

And finally, the more liquid credit market risk proxies – the iTraxx indices – closed higher reflecting the nervousness during the day. iTraxx Main was up at 76.75bp (+1bp) and X-Over at 293.75bp (+5bp) at the close.

As noted previously, we are now taking our own break and will be back on Tuesday 18th April. Have a good Easter.

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.