26th July 2017

Greece lightning

iTraxx Main

52.0bp, -0.5bp

iTraxx X-Over

235.9bp, -2.3bp

10 Yr Bund

0.57%, +7bp

iBoxx Corp IG

B+104bp, -1bp

iBoxx Corp HY

B+284.3bp, -5.5bp

10 Yr US T-Bond

2.32%, +7bp

FTSE 100 (live) [stock_ticker symbols=”INDEXFTSE:UKX”  static=”1″ nolink=”1″] DAX (live) [stock_ticker symbols=”INDEXDB:DAX”  static=”1″ nolink=”1″] S&P 500 (live) [stock_ticker symbols=”INDEXSP:.INX”  static=”1″ nolink=”1″]

Greece of course, what else?…

Into the final few sessions of July and fixed income investors will be hoping we don’t snatch defeat from some kind of victory in terms of performance for the month. Four weeks ago, June’s performance was savaged by that massive rate market sell-off. Government bond markets have had a choppy few weeks since, but yields are flattish in the month.

Credit spreads are tighter/tightening & heading into record territory for most segments of the corporate bond markets and returns for the month look like playing out in the black. Then a restful summer will follow!

The headline grabbing deal of the day was the triple C/single-B rated Greece‘s return to the capital markets after a three year enforced absence. In the long run, investors will be hoping that the 5-year maturity, 4.625% yielding deal will actually be a turning point (order book at over €6bn for the €3bn deal). That would mean that the beleaguered sovereign was back into some sort of recovery mode after many years in the doldrums. The deal was structured to extend its debt maturity profile as it tendered for the 2019s, but was probably priced a little rich in our view (top end of the range).

Still, partaking in the tender was worth it for those who could. The timing was good as well after some decent economic data from the country of late, and creditors disbursing some more cash earlier in the month. With nothing else on the screens in the session, there was little to distract the smooth running of the transaction. Away from that, it definitely felt like the summer season was in full flow with little on the screens as the corporate bond market almost drew a complete blank. The only deals came from German REIT Grand City Properties for €600m along with a €200m tap from Sodexo of its April 2027 issue.

The more controversial HY Diversey deal (investors made them do away with a spurious covenant clause) looks like it will finally price on Wednesday (€450m, 8NC3 and a likely 5.75% yield). Equities were perkier after a few down sessions – the US S&P equity index at or close to record highs, rate markets backed up, credit was clearly better bid and all are looking ahead to the FOMC release – and the end of the month. Even the euro breaking briefly through $1.17 was seemingly brushed aside, failing to halt a 0.5% rise in the DAX. The Eurozone’s brighter economic outlook mattered more in Tuesday’s session.

Hanging on for a few more days

July has again been fairly kind to the corporate bond markets with spreads again exhibiting a decent tightening/trend. We’re not there quite yet, but we do not anticipate disaster such that cash corporate bond spreads reverse course between now and Monday. We have the Markit iBoxx IG index 7bp tighter this month so far and just 10bp off equalling the record low for this index.

In HY, the index is at a record low level of B+284bp which is 9bp tighter this month so far. This is all the more impressive given that it comes after a €4bn+ month of issuance and total supply year-to-date running at close on record levels. Total returns are positive for both markets for July so far – but the rate market might still have a say if they stay that way come month-end. There was, after all, a decent sell-off in Tuesday’s session.

We will update the month’s final returns early next week. Sterling spreads, as measured by the same index are a couple of basis points tighter in the same period, left at G+133.4bp – and multi-year lows.

Record US equities into the FOMC

A raft of upbeat earnings reports from the likes of bellwether Caterpillar, United Tech and Eli Lilly with McDonald’s second quarter sales growth the best for 5-years all helped US stocks through an upbeat session.

And timely it was, with the FOMC starting their deliberations and month-end just a few sessions away. We had new records set for the S&P and no doubt the others will follow in due course, the Fed permitting of course. Government bonds closed out with the 10-year Bund yield up at 0.57% (+7bp), Gilt at 1.26% (+6bp) and OATs rising to 0.81% (+7bp). Oil had a good day on Saudi production news, with Brent breaking through $50 per barrel.

In credit, the synthetic indices reversed the higher costs from the previous session to close lower into the better tone elsewhere. Main was down at 52bp (-0.5bp) and X-Over dropped to 235.9bp (-2.3bp). A quieter cash market wasn’t to be held back and spreads tightened again with a decent squeeze.

The IG iBoxx cash corporate index tightened by a basis point to B+104bp and is closing in on that B+94bp record low. The lack of supply into brighter risk-on markets might see us there sooner rather than later. At G+132.9bp, the sterling corporate market was also tighter, by around 0.75bp for the sterling corporate index.

As for the high yield market, the index went deeper into record territory with index cash spreads at B+284.3bp – crunching a massive 5.5bp tighter in the session. Year to date, this HY index is 130bp tighter! Enough said.

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.