16th March 2017

Fed nails it, waiting on the Dutch

FTSE 100
7,369, +11
12,010, +21
S&P 500
2,385, +20
iTraxx Main
72.25bp, -1.75bp
iTraxx X-Over Index
284bp, -6bp
10 Yr Bund
0.41%, -4bp
iBoxx Corp IG
B+132bp, unchanged 
iBoxx Corp HY Index
B+376bp, +4bp
10 Yr US T-Bond
2.50%, -9bp

Complacency or pragmatism?

We’ve faced much event risk over the past few months – but the markets have sailed through the potential for a major wobbly. We had a vote in the UK to leave the EU – in 2 years time – but there has been little negative market reaction to it. The markets have moved higher. President Trump triumphed in the US election and while he might be a little erratic (to say the least), the US equity markets have seen record highs on many occasions since.

Trump’s policies are intended to be pro-growth, so we have had the expected equity market reaction to it. Yesterday, the Fed delivered the rate hike that the markets expected (25bp to 1%) – it was all but priced in – and we will sail through that too, over the coming sessions. Well, with just three hikes expected this year as the Fed stuck to its guns, everything rallied!

However, we’re awaiting the result from the Dutch elections (as at the time of writing), where the result might not be priced in. Still, it was a non-event for the markets as far as equities were concerned, while we saw a better bid for government bonds as those markets exercised a little caution. In credit, no one cares. Secondary cash moves a little higher or lower (in price), but the new issue market is as effusive as ever. And surprisingly so.

Valuations generally remain at high levels relative to where growth/rates/inflation are, but that does not necessarily mean that markets are complacent. There’s always room for a major sell-off, but we need a crisis-inducing event.

More the point, we actually think there is a high level of pragmatism in the markets – and it has been reflected in how they have failed to panic on any of the aforementioned potential “banana skins”. After all, there’s still massive liquidity sloshing around the system, policy remains massively accommodative, the central banks are playing it softly, softly and so we’re all choosing to look on the positive side. Yesterday’s data (Eurozone/UK/EU) employment levels were upbeat, there’s a bit of inflation in the air and growth looks to be on an upward trajectory. What’s there to be afraid of?

Primary still cranking out deals

Svenska Cellulosa: 4-part deal for €2bn

We had deals galore – relatively, of course. We would have forgiven the primary market if we had drawn a blank in the session into the FOMC and Dutch election. But it was anything of the sort. SCA Hygiene hit us with a 4-part deal, while Proximus SA and Engie (dual tranche) also took the opportunity to launch deals.

BNPP became the latest bank to get some senior funding away and Spie came up for the high yield market. So no lull in activity or investor interest in the corporate bond markets. That sidelined cash needs a home.

Starting with Svenska Cellulosa (SCA), the 4-part deal for €2bn came in maturities from 20-months to 10-years and pricing was tightened from between 7-17bp, depending on the tranche. The high single-A rated Proximus SA issued in 5-years for €500m and took 10bp off the initial guidance. Engie’s green bonds were in the 7-year and 11-year maturity buckets for a combined €1.5bn and again only 10bp inside the opening guidance salvo. Still, that’s €4bn for the session and €6.1bn for this week so far. That’s better going than expected we would think.

In the high yield market, Germany’s Spie issued a bullet 7-year for €600m of SAG’s acquisition refinancing and took the total for this week in issuance to €2,275m. It’s shaping up to be a super month for the high yield market from a supply perspective. Finally BNPP came with a quick-fire €1bn in a 5.5-year senior non-preferred deal in floating format.

Markets tread water

Equity markets closed out the session a touch higher in Europe, obviously wary of how the Dutch political scene might look like once last night’s votes are counted. We think that Fed situation made little difference except to serve as an excuse to remain sidelined. Nor do we think that the data from the US – which was more mixed around retail sales, inflation, business inventories and oil stockpiles – had much of an impact. Still, with the Fed sticking to the likelihood of three hikes this year, the US markets rallied once the news was out. Why not? After all, we have growth, some inflation and a slower-than-previously anticipated rise in policy rates. It’s like, perfection!

Government bond markets were slightly better bid though with 10-year Bund yields dropping 4bp to 0.41%, there was 5bp of play in the OAT with the yield down to 1.05% while Gilts closed unchanged (10-year to yield 1.21%). The Treasury market rallied hard after the Fed decision, the curve flattening as the 10-year yield dropped to 2.50% (-9bp) and the 2-year to 1.31% (-7bp).

In credit, the iTraxx indices closed better offered (lower) with Main at 72.25bp and X-Over at 284bp. In the cash market, a light flow/volume market saw spreads unchanged in the investment grade market with the Markit iBoxx index for the IG sector at B+132bp, while we also closed unchanged in sterling secondary. The high yield market was also weaker, now some 12bp wider in the last few sessions, with the index at B+376bp. That ought to be reversed if equities go risk on in the next few sessions.

We expect a risk-on session today – the Dutch result notwithstanding.

Have a good day, back tomorrow.

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.