- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
Try, try, try again…
A conciliatory, reasoned and pragmatic tone to UK prime minister May’s speech last Friday was always likely going to be the best we were going to get. The rest is now back to due process, negotiation and the thrashing out of a deal with a less aggressive tone – from both sides of the Brexit negotiators. The opening reported words from Barnier suggest a constructive tone and as such, might be something that the market likes. Overall, we would think that Friday’s speech was probably bit of a distraction for the markets although UK stocks saw good in it (although, admittedly, the rising stocks could have come on the back of weakness in sterling). Sterling corporate credit spreads were completely unchanged.
We’re into the final week of business for what has been a fairly mixed September and one which wasn’t quite as kind to risk assets as we thought it might have been. Aside from US stock markets, that is, having seen several new record levels being set for the S&P and Dow. European equities have failed to move in tandem with them for the most part. Government bond markets have been a little weaker (yields higher) on geopolitical event risk, while the Gilt market has recoiled following some unwelcome inflation data and MPC member comments that an interest rate hike is nigh.
As it happened, the markets fizzled out into some kind of bore draw last week. The FOMC meeting midweek and the bash at the UN might have had something to do with it. Next week brings Yellen, Draghi and Carney on certain podiums and their words will no doubt be monitored by the markets. And there is also a raft of US data due taking in US GDP and durable good orders, for example. We don’t think the aforementioned will have a material impact on the corporate bond market where spreads ought to continue to grind out some more tightening. Investors, as always, will be focused on primary and we could do with a heavy week to make up for the more moderate levels of IG non-financial issuance we have seen of late.
As we close in on the end of the third quarter, we would have to say that the corporate bond market has, up until to now, delivered more than we might have expected from a performance perspective. The range of views as to how much credit might perform this year were quite broad when we started the year but the performance level thus far has come in at the top of the range. If we can manage to hold on to the gains – and that’s by no means a ‘gimme’, then we can be content for 2017’s work.
After all, the high yield market has returned 5.5% YTD on 125bp of index spread tightening and we’re just a handful of basis points away from seeing record low levels in spreads again. As for IG, few would have thought we would see returns at 1.7% (which is where they are YTD) on spreads 27bp tighter (all Markit iBoxx index). That’s also a very good performance level for both benchmark and total return investors. Rate markets have been kind.
High yield primary radiates
Last week saw €2.1bn of high yield issuance after a slow start, and the monthly total now stands at €8.5bn. We’re thinking in terms of €10bn or so by the time we close out this week for the full month. Stada‘s inaugural deal was the pick of the bunch as demand for the bonds saw the offering upsized to €1.075bn.
Friday closed with NIBC printing a €200m AT1 transaction and Heineken taking 10bp off the initial price talk to print at midswaps+50bp in a 12-year deal for €800m.
We might have had the German elections on Sunday come up with the expected result (see below) but the quarter has delivered anything but, in terms of German IG-rated non-financial corporate borrowers in the market. Last week’s Brenntag deal for €600m is only the second such one this quarter from a German borrower (Daimler’s €500m earlier in September being the other)! And that comes knowing that German borrowers usually account for 20% or so of total non-financial IG issuance on average in any given year. For this quarter so far, UK borrowers top the list with 27% of the total supply followed by French ones at 16%, then Italy 11% and US corporates at 9%.
Reasons to be cheerful
Otherwise, we closed Friday with the markets not really doing much. US equities closed mixed but close to flat (S&P up 1.6 points, the Dow down 9.6 points for example) and that picture was replicated across European equities. Similarly, rate markets did little and were perhaps slightly better bid if anything. Moody’s downgraded the UK to Aa2 after the close on growth and Brexit concerns.
In credit, index edged wider with Main at 59bp (+1.8bp, Series 28) while X-Over was up at 258.4bp (+4bp) and we think that weakness was due to continued shuffling of positions into the new contract. The cash market did very little with IG risk unchanged – the iBoxx at B+107bp and the high yield index at B+282bp.
We ought to be on the front foot as we start the week, with the German election delivering the expected fourth term for Merkel (and likely a coalition with the SPD although the CDU has options) while, also as expected, the AfD managed a surge in nationalistic support and around 13% of the vote. Better the devil you know.
Have a good day.
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