10th June 2018

Handle with care

iTraxx Main

74.6bp, +1.7bp

iTraxx X-Over

313.7bp, +7.6bp

🇩🇪 10 Yr Bund

0.45%, -4bp

iBoxx Corp IG

B+129.2bp, +2.2bp

iBoxx Corp HY

B+384.8bp, +10.7bp

🇺🇸 10 Yr US T-Bond

2.95%, +1bp

🇬🇧 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″]

No more plundering the piggy bank…

After Friday’s performance in the rate markets, the ECB has a job on its hands articulating a measured macro view when it meets later this week. After factory orders disappointed previously, German industrial production dropped by more than expected in April (-1%) versus March suggesting that the Eurozone’s most important engine for growth is spluttering.

It certainly isn’t going to re-energise the region anytime soon. The G7 trade tariff spat will see to that. Trump has ruffled feathers, some would say in a refreshingly politically incorrect way (he will call you out as he sees fit) and is proving to be someone few will want to do business with. Unfortunately, they have to. Where Trump’s concerned, it’s a case of proceed with caution.

So it wasn’t because of Italian politics that we went into the weekend in a defensive mood as we saw a decent enough bid for rates into last week’s final session.  We see ourselves grappling with much rate market volatility as a result of headline risks borne from the uncertainty that comes from doubts on Eurozone growth, QE longevity, Trump and his tariff war and how Brussels and Italy will fight it out over the coming months. Friday’s range, for example, for the benchmark 10-year Bund yield was 10bp, with the yield as low as 0.39% versus a previous close of 0.49%. We’ve seen 0.19% and a high of 0.52% all in the last week.

We talked about an inflexion point for the markets recently, and it seems as though we are still in that period of contemplation although the aforementioned highlighted issues suggest the risks are to the downside (growth, geopolitics – and thus yields). Draghi may well try to talk up the recovery – he will probably have to, but he will certainly comment that the ECB remains vigilant to the risks (point to those just mentioned). As a result, it is more than likely we won’t be any the wiser as to whether QE ends in December.

The corporate bond market, however, seems to have rid itself of much of the volatility which begets the rate market at the moment, and more often than not the equity markets. Our market is illiquid, the loose holders have likely exited their Italy-related/high beta banks/peripheral positions, and the lesson of the past couple of weeks is ‘don’t panic’. Of course, lower equities means a defensive bid in credit, rate volatility means reduced primary activity so there is an impact.

But unless we get something definitive and negative from Italy, we are unlikely going to fall out of bed like we did last month with that massive near 30bp widening in the iBoxx IG cash index. That’s not impossible – we’re just enjoying this relatively calmer moment.

Primary market has another victim

Matterhorn Telecom became the latest borrower (HY in this case) to postpone a deal, as investors baulked at the looser covenant language. It’s good to see that investors are wising up. That’s not to say the market for HY borrowers is closed, because Friday saw a €1bn print from Interxion Holding NV in a 7NC3 structure priced at 4.75% which was the wider end of the opening range. That deal was the only corporate primary effort of the session, and takes the total so far for June of high yield issuance to just €1.375bn. The total year to date to €36.1bn and almost 50% of last year’s full-year record level (which was €75bn).

The IG market drew yet another blank on Friday. We know the pipeline is vast. We know the demand is considerable. The summer lull beckons too. But we’ve had just €3.65bn worth of deals this month as we approach the halfway stage of it. And we have yet to see €100bn – at €98bn of issuance, it’s the lowest run rate for IG non-financial transactions since the Eurozone’s existential crisis maligned period in 2012.

Defensive tone sees in the new week

We closed last week on the defensive in Europe while managing to chisel out some gains in the US. European stocks closed 0.3% lower although losses were considerably higher intraday. The US markets closed up to 0.3% higher.

In rates, price gains were faded a little, leaving yields off their session lows by the close. The 10-year Bund yield eventually left at 0.45% (-4bp), Gilts were unchanged at 1.39% while BTPs were up at a yield of 3.11% (+7bp). In the US, Treasury yields rose a touch, the 10-year left at 2.95% (+1bp) having been as low as 2.89%.

Synthetic credit succumbed to the jitters mentioned above, leaving iTraxx Main at 74.6bp (+1.7bp) and X-Over higher at 313.7bp (+7.6bp) with few wanting to have some protection on board into an uncertain weekend (Italy, G7).

In cash, we had some weakness too, leaving the Markit iBoxx index 2.2bp higher at B+129.2bp – but the index did at least manage to close flat on the week. The sterling market was also a touch better offered for choice, but the index was a basis point tighter for the week, at G+154.7bp. For once, the high yield market had a worse time of it – not helped by that pulled Matterhorn deal as far as sentiment would have been concerned, the index almost 11bp higher B+384.8bp (but flat on the week!).

Politics dominate this week and the calendar looks fairly full which means activity in the corporate bond market is likely to remain light. The Trump/Jong-un summit takes centre stage on Tuesday. As for the G7 meeting just passed, there’s a seriousness developing in both the way politics are now evolving as Trump dismantles liberalism and conciliation, but also how we might all need to reassess the economic model of the last 40 years. The old world economic order (model) where the US consumes what everyone else produces is about to be restructured, to say the very least. Good or bad, there’s a comfort zone we’re all about to step out of.

Also on Tuesday, we have the EU withdrawal bill back before the UK parliament with a series of amendments due to be voted on. In the US, we have inflation data, industrial production and retail sales figures all due as well as the FOMC rate decision on Wednesday (25bp hike widely expected).

On Thursday, the ECB will leave it all unchanged. While several hawkish comments emerged from ECB board members last week, leaving the markets thinking QE ends at year-end, we think they will be swatted aside by Draghi.

And finally, the World Cup also kicks off on Thursday, likely at times to curtail market activity over the coming month.

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.