26th January 2017

He’ll do what he wants

FTSE 100
7,164, +14
11,806, +211
S&P 500
2,298, +18
iTraxx Main
68bp, -1.5bp
iTraxx X-Over Index
286bp, -3bp
10 Yr Bund
0.47%, +7bp
iBoxx Corp IG
B+132.5bp, -1.5bp 
iBoxx Corp HY Index
B+374bp, +-7bp
10 Yr US T-Bond
2.52%, +5bp

Spend spend spend…

They’re all it. If it’s not Trump in the US, then it’s Intesa possibly having a go at Generali. Yes, the latter is news, and potentially big news. And definitely it would leave Intesa to become a bank simply too big to fail. Far too big. Italian solution or not to protect (potentially) one of Europe’s biggest insurers and keep it under domestic control, surely we’re not thinking that the bank/insurance model is making a comeback.

We’re playing to Trump’s tune, although away from his plethora of executive orders, the markets are showing their willingness to trade the macro headlines. Yesterday, a former ECB member struck a dovish tone in her assessment of the inflation uptick, we had German and French business confidence fall, Spanish producer prices rocketed higher in December, while French Presidential favourite Fillon was potentially embroiled in some scandal.

That all left equities in upbeat mode, with markets willing the Dow to finally top the 20,000 level – for which it later duly obliged. And that landmark level was the day’s big story. Sterling is powering back too especially against a recently beat-up dollar, touching $1.26 and €1.17. The bond market is more and more starting to reflect the potential for sustainability in the macro recovery.

Corporate primary draws a surprising blank

Atlantia SpA was holding an investor call – with an 8-year deal likely in today’s session, while Indian state-owned power generation corporate NTPC was looking for 10-year funding (issued €500m, 25bp inside IPT). The rest was the usual flurry of SSA issuance in a strangely quiet session. We have had €5.1bn of IG non-financial supply so far this week, but it has come from just three borrowers. The month has delivered a fair chunk too at just under €25bn with a couple of sessions to go, but such is the receptivity to deals at the moment, we are surprised that more borrowers haven’t as yet come to the fore.

Furthermore, given the cock-a-hoop, high-fiving that goes on when deal pricings are tightened versus that initial guidance, we would have thought a clamour by borrowers to get funding away. After all, rising market rates (bond and swap yields) are trumping any secondary market spread tightening and so funding costs are rising – by the day. The earning season takes out a few borrowers because of the blackout period, but it is so drawn out in Europe, there are many borrowers who could print.

Equities up, bonds down

The day’s earnings stream was generally positive led by Boeing. Santander was upbeat while Novartis announced a $5bn share buyback and dividend increase. Overall, the push higher saw the DAX up 1.8% with most other European bourses up over 1%. UK stocks were up around 0.5%. In the US, the S&P, DOW and NASDAQ saw fresh record highs amid an exuberant investor base choosing the session to trade the economic positives of Trump’s policies.

When equities go higher – especially around the potential for a positive growth dynamic, then government bond markets must see prices go lower (yields higher). And yesterday, we had that dynamic in a classic session. Bond yields saw the UK 10-year Gilt yield up at 1.47% (+7bp), the same maturity Bund was yielding 0.47% (+6bp) while the 10-year Treasury sidled up to 2.50%, up eventually at 2.51% (+4bp). Italian debt yields zoomed past 2%, to 2.12% while Spanish 10-year debt yields rose to 1.58% (+9bp). And just at the time of the month where fixed income players are looking at performance a little more carefully! Those rising yields are going to eat into total returns.

But high yield credit in great shape

Sterling markets have been well-supported of late, and one of the reasons they haven’t gyrated so much to higher Gilt yields is that the BoE has been lifting the market. The Bank communicated in yesterday’s session that it had accumulated £5.23bn of debt as part of its QE purchase programme – after just five months of an 18-month effort to lift £10bn. It might be getting more difficult to find the value in the market from now on, but they did suggest they will likely end the QE purchases sooner than the original deadline. All that said, the Markit iBoxx index for sterling corporate bonds closed at G+149bp (+0.5bp).

In the secondary euro markets, a light session still managed to elicit tighter spreads helped by those better equity markets and the general risk-on tone most evident in equity markets. And the moves were the largest this year so far! The iBoxx index closed 1.5bp tighter at B+132.5bp – and to the tightest level this year too. Unfortunately, the back up in rates was greater though and returns fell a little deeper into the red (-0.65% for the month to date).

For the high yield market, the good news goes on. We’ve barely had much by way of issuance (just €2.35bn) and coupled with the better economic data, market valuations are on the up. Spreads ratcheted tighter leaving the index tighter at B+374bp – some 7bp lower on the day. Returns for this opening month so far are up at a heady +0.8%, in stark contrast to IG credit.

With equities on a high, the iTraxx indices were always going to be lower as the cost of protecting credit declined. Main was at 68bp (-1.5bp) and X-Over at 286bp (-3bp).

That’s it. Back tomorrow.

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.