3rd May 2018

Growth fears rise

iTraxx Main

56.7bp, +1.9bp

iTraxx X-Over

276.1bp, +4.9bp

10 Yr Bund

0.53%, -5bp

iBoxx Corp IG

B+106.8bp, +2bp

iBoxx Corp HY

B+327bp, +5bp

10 Yr US T-Bond

2.94%, -2bp

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=”15″], [wp_live_scraper id=”16″]

And the problems might just be beginning…

We rarely have a wasted week, but this week feels like it has just passed us by. If anything is to be gained from it though, we now have clear evidence that the European economy is in slowdown mode amid weakness in the industrial sector, nervousness around the trade tariff situation, declining confidence and investment – leaving GDP growth starting to falter amid a subduing in the inflation rate. That data needs to pick up significantly over the rest of this quarter (we would think) for the ECB to tighten policy come September (as most anticipate). It’s unlikely going to do that as US monetary policy looks set to tighten as the current administration’s inward-looking economic policy takes away the candy for the rest.

So the Eurozone is not going to be blowing hot  – we might have seen the best of it, but we can hang on to these lower rates of growth. The ECB will need to stay fairly accommodative if the data doesn’t improve. US rate markets will likely diverge from those in the Eurozone as the former potentially sees 10-year Treasury yields rise more firmly into the 3% territory while the Bund is anchored in a 0.55 – 0.70% context. Corporate credit in Europe will garner a decent bid, recognised as a fixed income asset class still offering good stable credit metrics and capital protection (your money back at maturity) while offering a yield in excess of the traditional risk-free rate.

While Trump is in charge and if a more protectionist regime really does take a foothold, then the global economy will no longer get the usual big leg-up from the US. That is, no more piggyback rides as we might now play out an ‘every man for themselves’ like medium-term economic outlook. We’re going our separate ways to some extent – divergence.

It’s a little deflating, but corporate bond investors are probably getting what they wished for. No breakneck growth, no rate market sell-off, few signs of inflation and an ECB needing to play ball. We could though do with more IG issuance – and lots of it. The room is there, the demand is too and the sidelined cash is burning a hole in those portfolios. There was a smattering of deals on Thursday and we have most likely concluded the week’s business given the non-farms payroll report due on Friday – which usually has the effect of giving the market a day off.

Unfortunately, next week promises much the same with a UK Bank Holiday on Monday, Victory Day 1945 on Tuesday and Ascension Day closing several markets across Europe on Thursday.

Primary market ticking over

Deals for Daimler

Primary markets threw up a few deals, but we couldn’t say it burst into life. We had the first senior bank issue for almost two weeks, with BBVA in the market for €1bn in a 7-year green bond priced at midswaps+80bp. The book was up at €2.8bn and final pricing some 15bp inside the initial guidance.

The IG non-financial market came up with Daimler, with the borrower issuing €1bn in a 4-year maturity at midswaps+20bp (-15bp versus IPT) along with €1.25bn in a 7.5-year maturity costing midswaps+42bp, which was 13bp inside the initial guidance. The combined books were up at €3.5bn.

The €2.25bn in the session from Daimler takes the automotive sector’s deals in euro-denominated IG debt markets to €16.8bn versus the €72.9bn total issuance this year so far (23% of the market).

In high yield, Nitrogenmuvek will price €200m of 7NC3 maturity debt at 7% on Friday, as will Aldesa Agrupacion Empresarial for €300m at around 8.75% and Picard Groupe was tapping its Nov 2023 issue for €60m. And we potentially have €2bn+ coming from Italian broker Nexi.

Safe-havens in vogue

The data front opened with the weak inflation numbers for April in the Eurozone. The headline rate declined to 1.2% in the year to April from 1.3% in March – which doesn’t bode well for the ECB’s 2% long-term target. The core rate did even worse, dropping to 0.7% in April year on year, from 1% in March. Government bonds received a bid on the news, the 10-year Bund yield dropping to 0.53% (-5bp), for example. It wasn’t much better in the UK and although services growth rebounded in April, it missed expectations. Gilts were better bid, leaving gate 10-year yield at 1.38% (-8bp).

US Treasuries were better bid, the yield on the 10-year back at 2.94% (-2bp) just as it was reported that service sector growth had slowed in April versus March (ISM at 56.8 against 58.8). It’s non-farms payroll up next.

Equities were on the way to reversing the previous day’s gains. The Dax was off by 0.9% and the FTSE was lower by 0.5%. US stocks dropped by up to 1.5% at one stage as nerves frayed on the start of the US/China trade tariff talks – and not helped Tesla’s Elon Musk, who had a ‘car crash’ of an analysts earnings call. At the time of writing, they had recovered to around flat!

In the credit world, we went with the risk-off tone elsewhere. The iTraxx indices moved higher as the cost to ensure credit moved higher. Main was up at 56.7bp (+1.9bp) while X-Over rose by almost 5bp to 276.1bp. Cash followed suit, and we were wider in the session. The Markit iBox index was, therefore, higher at B+106.2bp (+1.8bp) – which is a bit of surprise given how technicals and fundamentals should be so supportive. And finally, the high yield market also was marked wider (nothing too much going on) leaving the iBoxx index at B+327bp (+5bp).

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.