1st April 2019

Fast out of the blocks

iTraxx Main

62.3bp, -2.7bp

iTraxx X-Over

258.7bp, -10.2bp

🇩🇪 10 Yr Bund

-0.03%, +4bp

iBoxx Corp IG

B+137.2bp, -2.5bp

iBoxx Corp HY

B+428bp, -10.5bp

🇺🇸 10 Yr US T-Bond

2.48%, +7bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Mixed bag, risk on, good start…

The second quarter’s solid start was tempered only a little by the delivery of a mixed bag of economic data. The pick of the bunch took in Eurozone manufacturing which remains in the doldrums (German woes deepening), the UK factory sector has had a very good March because of Brexit (stockpiling) while the Caixin survey suggested that the Chinese manufacturing sector emerged from recession in March.

Core Eurozone inflation declined to 0.8% from 1% in the year to March in a worrying development. ECB action must be coming soon. Hopes that there might be a breakthrough on the US/Chinese trade talks though as ever continue to be the main catalyst for any material rise in risk asset prices. European equities came off the session highs, still rising by over 0.5% (or 1% in the case of the Dax), rate markets were in retreat and yields were edging higher – the 10-year Bund yield to -0.03% (!) and credit spreads were tightening into the better tone for risk assets.

It wasn’t the busiest of sessions, though; We were mostly still focused on Brexit and the latest (second) round of indicative votes in Westminster. Credit primary saw an IG non-financial deal from Toyota while Holcim issued hybrid format (rated high yield), following on from Total’s hybrid deal last week. ING Bank took some shorter-dated funding and in the sovereign space, Mexico visited with a dual-tranche deal.

The level of the IG iBoxx index yield (duration around 5) closed out the first quarter at 1.08% and is the lowest level seen since January 2018 with spreads at the same point at B+139bp – which we last saw in October 2018. The lowest yield in the index came back in the Aug/Sept period in 2016 at 0.83%, while the tightest spread was B+82bp at the beginning of February 2018.

So there is just 25bp to go for the index yield to set new records while we still need some 57bp of tightening in the index for spreads to record the same feat. The dynamics for that suggest that the former is more likely than the latter. If we are heading for those levels again, they will be most easily be met if the ECB embarks on a fresh QE exercise (which was the main driver for the previous lows/tights).

Most likely, though, we are heading for continued economic weakness. So policy will remain as loose as possible to help stem the downside risks – as well as any cliff events. That is the tricky macro environment we’re trying to trade our way through.

With that in mind, if the central banks can manage the situation with a gentle massage to keep macro ticking over, then there is no reason for spreads to squeeze tighter, primary to keep churning out deals to absorb the inflows into corporate bond funds and deal performance maintaining good levels of confidence in the market.

So another 10-20bp of further IG spread upside is possible this year. Surely it is a stretch to expect 30bp+ like what we saw in Q1. Rates thus will be the differentiating factor and the principal driver taking us to close to that previous record low index yield of 0.83%. Watch that 10-year Bund, because if it tests/surpasses the record low -0.13% yield, then we’re going to get very close to that iBoxx index yield record low.

Primary’s fun and games

The Holcim hybrid was the session’s big corporate deal. The building products giant took €500m at 3.125% in a PNC5.25 offering. The order book exceeded €5.25bn. Final pricing was a massive 62.5bp inside the opening guidance and took out all the new issue premium – which is seemingly the norm these days. However, looked at another way, there is always an element of price discovery for deals of this ilk, but 60bp+ of tightening smacks of some level of incompetence in that initial pricing.

Toyota Finance Australia issued €650m in a 2-year fixed deal and followed up with a €500m 5-year transaction at midswaps+23bp with pricing tighter versus the initial talk bu 17bp and 27bp, respectively. Combined books were up at around €4.2bn.

In senior financials, ING Bank issued €1bn in a 2-year floater, €750m in a 3-year floater deal and €1.25bn in a 3-year fixed effort as they represented the senior bank sector with that three-trancher.  The deals were 10-22bp tighter at final pricing versus the initial talk off a combined book of €8bn. Not bad.

Rounding off proceedings, United Mexican States (Mexico) took funding in 7-year and 20-year maturity offerings for €1.5bn and €1bn, respectively.

Rallies all round

That US retail sales for February recorded a 0.2% fall month on month in February agains expectations of a rise by 0.3% had little impact on markets, which were later boosted by data showing that US manufacturing rebounded in March (ISM of 55.3 versus 54.2 in February).

For the opening session of the week, equities roared ahead on the Chinese and US manufacturing reports it seems. Hopes of a softer Brexit were the chief reason for the rally in UK stocks, sterling’s rally and the sell-off in the safe-haven Gilt market.

The FTSE rose 0.5%, the Dax added 1.3% and US equity markets were up to 0.8% higher as at the time of writing. It was a solid risk-on session.

In rates, we had a severe reversal with yields rising hard almost across the board. In Gilts, the 10-year benchmark yield rose to 1.04% (+4bp), the equivalent maturity Bund yield rose to -0.02% (+5bp) and the US Treasury went up at 2.49% (+7bp).

Credit protection costs dropped and the much better-offered market into the upbeat tone allowed iTraxx Main to close out at 2.7bp lower at 62.3bp and X-Over was 10.2bp tighter at 258.7bp.

That was all reflected in the cash market, with little reason for anything other than the market to tighten. And so the Markit iBoxx IG cash index moved 2.5bp tighter amid a serious squeeze of an illiquid market, to B+137.2bp while the CoCo index was making hay too, spreads there tightening by 8bp to B+591bp.

In the high yield market, higher equities usually equate to tighter spreads and that Holcim deal, while rated high double-B would have elicited by far and away 95%+ orders from IG investors. So an effective blank in primary. Spreads tightened by 10.5bp to B+428bp. Crunch.

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.