16th February 2017

He’s still the story

FTSE 100
7,302, +34
11,794, +22
S&P 500
2,349, +12
iTraxx Main
71.5bp, -1.5bp
iTraxx X-Over Index
290bp, -3bp
10 Yr Bund
0.37%, unchanged
iBoxx Corp IG
B+134.5bp, -1.2bp 
iBoxx Corp HY Index
B+372bp, -2.5bp
10 Yr US T-Bond
2.50%, +3bp

The chaos and the calm

Habitual headline-hogger: The Donald

President Trump remains the story but we’re no longer thinking economic policies or executive orders. There is now more than a whiff of scandal in the air – but someone has forgotten to tell that to the markets. Record high closes yet again in the US overnight made for a sprightly opening and session in Europe yesterday.

Much of the better tone is put down to Janet Yellen’s quite reflective and pragmatic testimony as the US Federal Reserve chief shows that she is calming influence at the helm. The rate hikes are coming.

For the markets, we’re trading off the prospect still of that “phenomenal” corporation tax announcement to come, likely some time in the next week. US economics are looking good anyway and the data emerging from Europe has been very good of late, justifying the rise in risky asset valuations. There is going to be no rate hike this side of the Atlantic until well into next year (or after) and so funding costs will remain accommodative, as will the need for higher yielding assets (mainly fixed) into a low rate regime here.

The headwinds are many and gathering

The tweets from Trump had suddenly declined in their frequency (sometimes it’s best to keep one’s counsel) – but they were quite combative during yesterday. The French elections – as if we need reminding – are not far away. And there is growing discontent against Merkel’s ongoing reign as Chancellor in Germany.

Other data yesterday had UK unemployment unchanged at 4.8% while wage growth cooled a touch – unexpectedly. Net net, we are going to have diverging interest rate policy in the US versus Europe, and we believe more than likely that market yields are going higher in the US versus Europe too.

Equities as usual will do their thing. They could end the year down several percentage points or up 10%+; That’s just the nature of that market. Credit looks like it is stuck somewhere in a no-mans-land where it moves with small ranges, failing to push on in any direction with any certainty and without gusto. Investors are content to sit on their huge cash balances and try their luck on adding corporate bond risk through the primary market. This market has delivered in fits and starts only, though.

So, we sit with spreads on an index basis a basis point wider in IG YTD, returns in IG slightly negative while higher equities seem to have dragged HY valuations better. Spreads have tightened 30bp or more with returns at a very impressive 1%+ for the year so far. Higher beta credit is also currying much favour with a good bid for it demonstrated by Tuesday’s massive 4x oversubscribed books for the Pemex deal.

US economic data stirs…

A potentially laboured session moved into a higher gear as US consumer prices rose by their highest rate in some five years in January. Retail sales also got off to a solid start for the year in January. That was signal enough for futures markets to suggest that a March interest rate hike has become more likely, while the dollar gained a head of steam, too.

Not that they needed it, but US equities also pushed higher as the 10-year US Treasury yield rose 4bp and above 2.50%. It dragged German yields higher, the 10-year Bund yielding o.39% (+2bp) before the Bund recovered to unchanged but there was no follow-through for Gilts, where the yield on the 10-year was 2bp lower at 1.29% at the close.

Credit not as quiet as it could have been

Toyota: £350m long 4-year print at G+70bp

The new issue market was focused a little more on sterling supply. Toyota was the headline deal with a £350m long 4-year print at G+70bp while in the high yield sector, Jerrold Finco (Together) missed £200m in a 7NC3 deal yielding 6.125%.

In euros, we had real estate groups CA Immobilien (for just €175m) and Unibail-Rodamco which issued €600m. The euro-denominated IG non-financial sector drew a blank. The rest was covered bonds and some SSA supply.

In the secondary market, the Toyota deal didn’t put off sterling valuations, and the Markit iBoxx index edged better to G+151.7bp and returns remain in negative territory year-to-date. For the euro-markets, we also moved smartly better and the IG corporate bond index was left at B+134.5bp (-1.2bp), while the HY index was close on the tightest levels of the year at B+372bp (-2.5bp).

And finally, iTraxx Main outperformed and was left at 71.5bp (-1.5bp) an X-Over at 290bp (-3bp).

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.