20th April 2017

Fatigued and wary

FTSE 100
7,113, -35
12,016, +16
S&P 500
2,337, -5
iTraxx Main
75.6bp, -1bp
iTraxx X-Over Index
295bp, -4bp
10 Yr Bund
0.20%, +3bp
iBoxx Corp IG
B+132.1bp, -0.4bp 
iBoxx Corp HY Index
B+376.7bp, -5bp
10 Yr US T-Bond
2.21%, +3bp

It’s like that, is it?

The market is not closed for business. It might feel like it judging by the lack of flow in secondary and absence again of anything which matters in primary. But someone needs to tell borrowers that going to the market now is an opportune time.

The demand, funding costs and general conditions for corporate issuance are as good now as at anytime over the recent – and at times – turbulent months.

There’s also a lack of competing supply, so securing the all-important 20bp or so off the initial guidance would be akin to a gimme. Admittedly, we don’t think that the world will look too much different post the French and UK elections from a borrowers perspective – so it just appears that corporates are funding when they need to, not when they can.

The lack of primary makes for tedious sessions for corporate bond market investors. Spreads are barely moving, and wider at that, in recent sessions. For the year to date we’re just a little tighter, while high beta has performed into it and there has been good demand for lower rated risk. Returns are positive for the year so far, but the 1% or so which has been gained looks fragile and at the mercy of the rate markets. Of late, they’ve been better bid and yields across the curve have declined – precipitously in some cases.

There could be some more to go over the next couple of weeks through the French elections period. The situation after the final result sees the Bund yield through 0% again (in 10-years) or back in the 0.30% area. That will depend on the make-up of the successful presidential candidate.

Overall, markets are very quiet and there doesn’t seem much of a focus at all that North Korea might be firing off nuclear missiles soon enough. While we wait for potential nuclear meltdown or other market moving event risks to emerge, buy the dip.

Looking for inspiration

As for the day’s news flow, Morgan Stanley‘s earnings delivered a beat, while IBM’s sales missed. The Eurozone’s inflation rate flirtation with 2% has ended with a 1.5% annual growth rate recorded in March. Former UK Chancellor George Osbourne announced that he was to step down from politics in order to concentrate on filling his boots elsewhere!

Other than that, it is worth noting that sterling continued to hold above $1.28 and the UK Parliament voted in favour of holding the UK General Election on June 8. And the IMF’s bi-annual Global Financial Stability Report stated the obvious: That higher rates in the US on the back of more expansive fiscal policy where growth is subsequently of the unproductive sort poses risks for an overly indebted corporate sector. When the rate cycle ultimately does turn, higher debt servicing costs are going to impact more than just the US domestic market.

Primary credit markets drew a blank. There was nothing from IG non-financials, the euro-denominated high-yield bond market was similarly declaring a zero while the banking sector offered only a solitary covered bond issue. That’s just how it feels in mid-August at the height of the holiday season. Mind, in sterling high-yield, Travelodge finally printed £165m in a 6NC1 issue.

Ho hum

The equity markets played out in a small range and mostly in the black across the Euro-area with only the FTSE showing losses (-0.5%) to add to the ones on Tuesday. Government bond markets gave back some of their previous gains although OATs had a decent session of it with the Bund-OAT spread back inside 70bp in the 10-year area. The Bund yield was up at 0.20% (+3bp) and the OAT down at 88bp (-3bp) with Gilts giving back some too to close to yield 1.07% (+5bp).

In the corporate bond market, we managed to end the session pretty much unclosed to a tad tighter. The Markit iBoxx cash index was marked marginally tighter at B+132.1bp (-0.4bp – noise). The move was similar in the IG sterling market. In high yield, the cash index recovered some too, closing 5bp tighter at B+376.7bp.

Finally, the iTraxx indices were better offered (lower) with Main at 75.6bp and X-Over at 295bp (-4bp).

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.