22nd June 2017

Hanging on to what we’ve got

iTraxx Main

54.0bp, -1.5bp

iTraxx X-Over

234.1bp, +1bp

10 Yr Bund

0.26%, -1bp

iBoxx Corp IG

B+115.3bp, unchanged

iBoxx Corp HY

B+306.7bp, +3bp

10 Yr US T-Bond

2.16%, unchanged

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″]

Weaker oil dampens enthusiasm for risk…

It might still happen, but the weaker oil price isn’t yet having a material and direct impact on corporate bond market spreads. In a roundabout way, there is a dampening effect in that weaker equities are creating a risk-off environment and so spread markets don’t tighten and we see reduced levels of issuance.

But weakness – rather spread widening for the moment – seems limited, unlike that opening quarter of 2016 when a low-$30 per barrel handle led to a shunt higher in HY spreads, in particular. And this was not because the European market was in bad shape, but because of the contagion impact from an oil-heavy weighted high yield US market. Spreads (as measured by the high yield Markit iBoxx index) are 50% tighter since then.

Could it happen again? Of course it could, but once bitten we think the euro-denominated high yield market will handle most US high yield market concerns and weakness more calmly.

That’s suggesting that any sharp widening in US HY spreads emerging as a result of small periods of shale gas production companies feeling the pinch will probably see only a moderate weakness here. We are unlikely going to see B+600bp plus like index levels for a while – and that means not until the economic cycle really turns.

Anyway, Thursday’s session was a strangely quiet one with equities holding on to a small negative bias through it and safe-havens a little better bid. Primary credit markets were also relatively quiet, with little to get excited about around a subdued session which effectively ends the week, given that Friday’s usually proffer very little.

There was nothing in Thursday’s session in the corporate space save for a couple of state-owned/related borrowers in transport groups RATP and Ferrovie Dello Stato.

The week has been a good one though for IG non-financial issuance, though, with almost €10bn issued – but a poor one for the high yield one where nothing has been issued to the close of business on Thursday.

For secondary, spreads this week are wider for choice, and a couple of basis points tighter for the month so far in IG while in the high yield market, we’re a couple of basis points tighter this week and 20bp tighter this month. the markets have stalled late as the tone around oil/equities has been more downbeat.

Primary offers slim pickings

Thursday’s issuance was light and came from the likes of state-owned companies RATP (€500m) and Ferrovie (€800m), along with Italy’s Banca Farmafactoring (€200m) and a couple of covered bonds from the likes of Nationwide and BNZ.

The Ferrovie deal will have had been sold mostly into corporate bond investors despite the state interest in the issuer’s ownership. However, the main deal of interest was probably the €500m from insurer XL Group which issued a 30NC10 fixed to floating subordinated issue – which was priced 35bp inside the opening pricing gambit.

It’s barely worth a mention, but there was a late pricing of a N&W Global Vending tap for €40m of the 7% October 2023 issue in the HY market.

We would think that Friday could get a deal away – maybe in the high yield market, but again it isn’t going to be a particularly busy session. It could be that we’re saving the best to last, hoping for a busier week to close out June next week. Either that, or we’re going to have a busier July than usual which will be needed to get the annual run-rate in line with a full-year total of €250-270bn for IG non-financial issuance. The high yield market is already running at a pace which could see a record set for this market in 2017.

Lethargic feel to markets

Some will put it down to the weakening oil price this week that we have had a fairly “risk-off’ish” sort of week, and that’s certainly how we ended Thurday’s session. Equities across the board were trading either very small up or down while government bonds were stable to slightly better bid. Gilt yields in the 10-year maturity bucket dropped to 1.02% (-2bp), Bunds to 0.26% (-1bp) and OATs 0.60% (-1bp) and all barely moved in the week, too.

In the synthetic credit market, and to our surprise perhaps, Main was the outperformer as the cost to insure IG credit declined by 1.5bp to 54bp – and the lowest level since 2015, while X-Over edged a little higher to 234.1bp (+1bp).

That move in Main might have something to do Wednesday’s announcement by Markit that UK and Swiss banks would be included in the new index Series at the HoldCo Level for the Senior and Subordinated Financial indices come September, and that Markit would “consult with the industry before confirming further changes to be implemented to the index rules for iTraxx Europe Series 28.”

The cash market in euro-IG closed unchanged with the iBoxx index at B+115.3bp – as did the sterling corporate bond market, left at G+135.6bp. High yield secondary spreads were marked wider though, the index 3bp wider at B+306.7bp.

US stocks closed barely moved after giving up small earlier gains, but this might help the markets here end the week on a positive footing depending on the prevailing news flow. Any confidence coming from it is needed to hopefully help push through a brighter period as we close out the month next week.

We are looking for the month to close out holding on to the positive returns generated.

Have a good weekend.

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.