27th March 2018

F.O.M.O

MARKET CLOSE:
iTraxx Main

60.5bp, -1.5bp

iTraxx X-Over

286.8bp, -7.7bp

10 Yr Bund

0.50%, -2bp

iBoxx Corp IG

B+107.3bp, -0.4bp

iBoxx Corp HY

B+334bp, unchanged

10 Yr US T-Bond

2.78%, -6bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

So near, yet so far away…

Fear of Missing Out. There’s little else to explain the 2%+ rally in European equities at the open. And it is probably as good a reason as any in which to get involved! The US equity markets rallied hard the previous session on some sort of relief trade following a potential dumbing-down of the trade tariff regime between the US and China, after fruitful ongoing dialogue with the Chinese authorities.

That safe havens failed to sell-off suggests that the equity rally is an isolated/recovery-like event with much of a FOMO mentality prevalent. We have been extremely volatile in equities of late and the large daily falls and rises have in the past presaged ‘the big one’.

We might be a tweet away from it. Strangely, we haven’t become numb to the event-risk that comes from President Trump’s numerous tweets. There have been so many potential game-changing comments, but we react nervously to them all. North Korean rhetoric and missile testing barely had markets in a tizzy in comparison.

The supposed Russian state nerve gas attack in Salisbury didn’t move the (UK) markets at all. The Brexit referendum impact has faded. That Italy might have an anti-establishment coalition in place soon – and the potential repercussions for the Eurozone it might eventually have – hasn’t dented the lure of BTPs (10-year yield at 1.87% and -20bp in March).

But Trump’s tweets threaten something new, fresh – and if it impacts the US, the rest of the world feels the chill. For now, though, we are in recovery mode for stocks as investors bet on some kind of deal being struck between the US and China – ahead of more negotiations around how to curtail/reduce the trade deficit between the two countries and reduce technology transfer from the US to China. Basically, they’re hoping for the best!


Credit has its casualties

The primary market has without question been impacted by the volatility in stock markets. It shouldn’t, because we believe that many borrowers could still fairly easily access the markets without giving too much away in price. The demand is still there and sidelined cash still needs to get some risk on board. But there is much apprehension in some quarters about going to market for IG borrowers. The fact that they are full of cash and need not rush to get some additional (re)financing is most helpful for them.

On the other hand, HY borrowers are macro ‘volatility sensitive’ and in the early throes of a rising rate environment, they are rate insensitive too. However, HY rated issuance is running at a decent clip (€19bn) and is already ahead of the first quarter of last year (€16.3bn) – which turned out to be a record year for high yield primary issuance.

The other noticeable casualty in credit, emerging from the excessive volatility on equity markets has been the contingent convertible market. Is it still a screaming buy, well, just a buy then? We’ve been purveyors of this market as a good buy offsetting the exposure to lower yielding IG debt. However, the equity market sell-off has dented the lure of the asset class, and prices have recoiled such that the iBoxx index is 31bp wider YTD, and 105bp wider versus the index record tight level recorded at the end of January. Total returns for the CoCo index are flat, though, this year so far but they were up over 2% at the end of January.


Fingers crossed it ends well

With all that, we’re hoping to hang on to what we have and perhaps rustle up a little more to end the quarter on a more positive note – if not in positive territory for equities, and again flattish YTD in returns for IG and HY corporate credit. Judging by the volatility in the US markets, it might be too big an ask with just a couple of trading sessions to go in this shortened Easter week.

Nevertheless, we had the big recovery in European stocks, helped by a positive opening period in the US which actually took the S&P to around flat YTD at one stage. Unfortunately, the US markets dropped hard into the close and the S&P was off by 1.7% again – and back into negative territory YTD, while the Dow is around 3% lower YTD. The Dax index might have risen by 184 points on Tuesday, but it is still around 950 points lower YTD. It promises to be a weak session on Wednesday.

Akelius Residential took €500m

In rate markets, we didn’t seem to run away with the positive tone in equities, and safe-haven retained a better bid through the session. The 10-year Bund yield dropped by almost 2bp to 0.50% while the 10-year Treasury yield declined 6bp to 2.78% after a late rally; the same maturity Gilt closed at a yield of 1.41% (-3bp).

There was some stuff about Nato expelling seven Russian staff from the military alliance in Brussels, while the latest Eurostat economic sentiment indicator for March across the Eurozone dropped 1.6 points – to be expected given the market volatility and macro events throughout the month.

In credit, we had a deal from real estate group Akelius Residential, which took €500m in a 60.5NC5.5 hybrid structure priced to yield 3.95% (book at just €850m), while Ibercaja Banco issued €350m in a PNC5 CoCo with a somewhat juicy 7% coupon. The book for the Ibercaja deal was up at €950m, suggesting still excellent demand for AT1 corporate bonds. The last IG non-financial deal was a week ago (which was just €250m from Finnish telecom group DNA Oyj)… and so the famine continues.

For the iTraxx indices, we went lower as some relief came back into the thinking after that rise in stocks. iTraxx Main closed 1.5bp lower at 60.5bp and X-Over protection got 7.7bp cheaper at 286.8bp.

And the cash market was marked tighter as we might expect, given the mood of the European equity markets. It wasn’t a particularly active session but better bid we were, albeit in rather laboured fashion leaving the Markit iBoxx IG cash index tighter by just a touch B+107.3bp (-0.4bp). The CoCo market recovered 6bp, to B+387bp (+25bp YTD), but that level of tightening is just noise. As for the high yield market, it closed unchanged (B+334bp iBoxx index). What else?!

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.