17th May 2017

Falling apart at the seams

FTSE 100
7,503, -19
12,632, -173
S&P 500
2,357, -44
iTraxx Main
63.5bp, +1.6bp
iTraxx X-Over Index
255.4bp, +6.4bp
10 Yr Bund
0.38%, -5bp
iBoxx Corp IG
B+117.3bp, +2bp 
iBoxx Corp HY Index
B+322.3bp, +4bp
10 Yr US T-Bond
2.22%, -11bp

A mouthful of event risk…

There was an escalating dampening in risk appetite in Wednesday’s session which was totally understandable given the developments around US politics. We’d think still that there’s little to panic about at the moment, but there might be something sometime soon!

The markets have generally been resilient, though, over the past nine months through several potential banana skin moments, when they had every reason to sell-off materially. As a reminder, we’ve brushed aside the UK referendum result; Trump’s election success only led to record high levels for US equities (amongst others) and Macron’s success in the French election has given the EU/Eurozone a renewed vigour in which to potentially reshape its future.

However, Trump’s ‘folksy’ presidency might be unravelling so to say – but it looks like it could also be a slow burning fuse leading to an eventual impeachment. Historical precedence suggests that might be the case. The Brexit situation will likely inject some volatility into markets – but we will live with it, over the next two years of negotiation.

In France, Macron faces parliamentary elections next month, and the jury is out as to whether he can form an effective government – even before his policies can start to make a difference so sorely needed in the country.

That’s a mouthful of event risk markets have to swallow. And it is going to be a feature for the medium term. In the meantime, we get on with whatever business we can. It sees equities play out to the headlines – usually small up or down because of the potential event risk, but against the backdrop of some optimism on global macro.

Rate markets will be stuck in their ranges for exactly the same reasons that are impacting the direction of the equity markets. As for credit, secondary levels shouldn’t gap wider absent any material outflows to provoke it, while we could expect a grind better on any market stability and risk-on periods. It also means new issues – and plenty of them.

Primary markets ignore the furore

Merlin took an increased €600m

Whatever is going on in the real world, someone has forgotten to tell the funding markets. Wednesday’s session was another where borrowers were not afraid to come forward as the likes of Apple, Bertelsmann and Mylan issued in IG non-financial corporate space; we had REITS in the form of Merlin Properties and Unibail-Rodamco, while Commerzbank and KBC issued senior debt.

For high yield, the sole participant in the market was K+S which opted for a hugely increased €225m tap of the April 2023 issue. Several offerings were increased versus the initial indications, and goes to show the high level of investor demand in the market for new deals.

Bertelsmann made a fairly rare foray into the markets with a €500m 4-year deal at midswaps+25bp (10bp inside IPT) off a book which was 3x subscribed. Apple was back with a dual-tranche offering in 8-year and 12-year maturities which were finally priced 12-15bp inside the opening guidance for a combined €2.5bn. The IG non-financial issuance wrapped up with Mylan which issued a 3-year floater paying Euribor+50bp for €500m reducing the initial pricing by some 25bp.

The haul for the month is now growing rapidly, with €25,950m issued so far after just a paltry €1.8bn surfaced in the opening week. We’re on target to pass €30bn and wouldn’t turn our noses up at €35-40bn getting away before the month is out.

For the REITS, Merlin took an increased €600m in 8-year funding while Unibail opted for a dual-tranche 12-year and 20-year offering taking a combined €1bn. Finally, Commerzbank lopped 15bp off the initial guidance for €500m of 7-year funding priced at midswaps+75bp, KBC took €750m in a 5.5-year issue and ICBC Dubai missed a €500m 3-year floater.

Cautious markets: But an overreaction?

UK unemployment hit a 40-year low, but real wage growth was negative (high inflation) and productivity fell further in Q1. We believe that there’s no chance of a rate hike in 2017 in the UK (whatever the BoE might say), and Gilt yields declined 6bp to 1.07% while UK equities only fell by 0.25% into the close, after the US markets had opened 1% lower.

Prior to that, the FTSE index was around flat and outperforming, probably on expectations on their being no rate hike in the UK anytime soon.

The markets favourite phrases recently have been “risk-off” and “risk on” – and sticking with that terminology to describe Wednesday’s session, it was definitely “risk-off”. It came late though. The US came in feeling hot under the collar, and that 2,406 S&P record intraday high level of a few days ago seems like a long way away now (closed at 2,357, -44 points or -1.8%) – or a big “melt-up” session away. The DAX’s losses accelerated to 1.3% at the close, the CAC lost 1.6% while the VIX index (measure of volatility) spiked to 15.6% (+5 points).

The demand for safe-haven investments helped rate markets rally. The 10-year Bund yield dropped to 0.38% (-5bp) but was outdone by the 11bp decline in the yield of the equivalent maturity Treasury, left at 2.22%.

In the secondary cash market, we had obvious weakness but not really any material selling into it. As measured by the Markit iBoxx index, the IG market closed at B+117.3bp (+2bp) on one of those occasions where secondary market illiquidity saw a larger than what we might have expected weakening in valuations at the close.

The sterling cash market closed unchanged! The rally in the Gilt market helped push return YTD in the sterling IG corporate bond market to 3.3%. As for the high yield area, the weakness would have been a given the correlation this market has with equities. And it was seen in the session, which eventually left the iBoxx HY index at B+322.4bp, and a fairly measured 4bp wider.

Finally, the iTraxx indices – the credit market’s liquid risk proxy best reflected the weaker sentiment in the session, with Main up at 63.5bp and X-Over at 255.4bp, wider by 1.6bp and 6.4bp, respectively.

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.