21st June 2017

High yield: Spreads going tighter

iTraxx Main

55.5bp, +0.1bp

iTraxx X-Over

233.1bp, +1bp

10 Yr Bund

0.27%, +1bp

iBoxx Corp IG

B+115.4bp, +0.1bp

iBoxx Corp HY

B+303.4bp, +1bp

10 Yr US T-Bond

2.16%, +1bp

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″]

Awww, schucks…

From the jaws of victory – or the setting of more records – the market starts to pull back. In equities, that is.

Elsewhere, any moderate, or otherwise, weakness in credit is usually reflected through the iTraxx indices in the synthetic space, given the more technical nature of the cash corporate bond market which is supported by illiquid secondary. Investors with cash to put into the market do it generally via primary while realising that selling even into some weakness in the hope of buying corporate bonds back later is a fruitless strategy.

All that means that IF we have a major sell-off and investors have the need to exit the market, in extremis and en masse for whatever reason, then we’re set up for a traditional bloodbath in the corporate bond market – seen last in 2008 (financial crisis) and in 1998 (Asia/EM crisis) before that. The link between those sell-offs is (the potential for) that systemic financial crash.

It’s tempting to think 2018 will be it. After all, there’s symmetry in those dates! But, some did believe that credit would have had it’s day this year. Instead, we have the same dynamic playing out for us as we have since 2009. We have gone tighter, rate markets haven’t sold off – quite the reverse as higher underlying bond prices have boosted corporate bond returns, the demand for corporate bond risk is as strong as ever, and we might just be in the throes of a record year for issuance in the HY euro-denominated corporate bond market.

The support for corporate bonds seems quite entrenched and as long as we sit on the kinds of performance and returns we have seen already this year, then cash will continue to find a home here. For IG we’re comforted by 1.2% total returns YTD, in sterling corporate credit that’s over 4% and in HY we’re at 4% along with 111bp (25%) of tightening in the index.

We are still upbeat for the corporate bond market. For sure, though, we are going to require equity markets to play ball and offer little or nothing by way of a major correction. Because corporate spreads will ‘correct’, too – if only because the Street will see the need to mark spreads wider as they become reluctant to get hit any unwanted inventory and thus accumulate any additional build-up. They’re keeping it light.

The high yield market is the most interesting one right now given its spread performance this year and the record territory spreads reside in. They can go lower and if we look at the Markit iBoxx index as the broadest measure of how this market sits, the B+303bp current record tight level could be looking at an incredible B+275bp sometime this year. That would represent a tightening of almost 140bp on this index.

Primary still churning deals

There’s nothing like an upgrade to give borrowers an opportunity to get a deal out. On Wednesday it was the turn of BP, which took a combined €1.5bn in a dual tranche 8-year and 12-year maturity deal. The oil giant saw enough demand on a down day for risk assets to lop 13bp off the initial price talk to fund at midswaps+60bp and 75bp.

The other non-financial deal of note came from Safran which also came with a dual-tranche offering in floater format in 2-year and 4-year maturities for €1bn. That €2.5bn in the session took the weekly total to just shy of €10bn at €9.82bn and the monthly tally for IG financial issuance to €22.6bn. Swedish REIT Rikshem was the other deal in the market which came for €500m in 7-year funding.

Once again there was nothing from the high yield market (€6.6bn pointed in the month to date), nor was there anything from the financials sector.

Midweek jitters but no panic

The better bid for safe-haven risk in the morning soon dissipated as US index futures suggested a possible better start to the afternoon session for equities. Energy prices might be weighing on that sector’s stocks, but the market was trying to fight back elsewhere. It helped bring European stocks back to close to flat into the close. Oil prices fell again, with Brent below $45 per barrel and off some 3%.

Gilt yields rose after the BoE’s chief economist suggested higher UK rates were needed later this year (sterling bounced back some, too), the 10-year yielding 1.04% (+4bp). The rising yields were seen elsewhere too, with the 10-year Bund giving up a basis point to 0.27% and off a low session 0.24%, while the equivalent Treasury yield was up at 2.16% (+1bp).

In credit, the markets responded to the earlier risk-off environment in a very measured way. No panic here. The first port of call is always the iTraxx indices and they barely moved through the day, with Main at 55.5bp (+0.1bp) and X-Over at 233.1bp  (+1bp) – both residing at close to multi-year lows.

For the cash market, the IG sector closed unchanged with the index left at B+115.4bp and the sterling market did the same at G+135.7bp (+0.2bp). After all that, the high yield market saw spreads marked 1bp wider on a cash index basis at B+303bp.

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.