25th July 2018

Hot, hot, hot

iTraxx Main

63.0bp, -0.5bp

iTraxx X-Over

285.9bp, -1.7bp

🇩🇪 10 Yr Bund

0.39%, -1bp

iBoxx Corp IG

B+129.6bp, -0.7bp

iBoxx Corp HY

B+385.4bp, -1bp

🇺🇸 10 Yr US T-Bond

2.94%, -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″]

Holding our own…

A potentially difficult summer lies ahead

The markets are not going to give up without a fight, and it is looking as if we are into the early throes of a difficult summer. Trump continues to do his level best to make sure we don’t rest up too much, this time urging the EU to scrap all tariffs ahead of talks with the EU’s Juncker. Eurozone growth is slowing as we know it to be, as evidenced by PMI data earlier this week and business survey data on Wednesday. However, a more sprightly report from the German industrial sector allied with that Chinese stimulus put in place to help prop up their domestic economy saw to it that markets will rally if the news flow warrants it.

We are not totally down and out and so far, and it’s been a good month for risk assets with July’s performance to date seeing most markets registering some decent gains. Equities lead the way with 2%+ gains for the month so far being typical, while IG credit spreads are 6bp tighter (iBoxx index) and total returns are a shade in the black for the month so far even after that recent sell-off in the underlying.

The high yield market has fared better with spreads 30bp tighter in the index and returns up at +1.5% for the month so far. After a fairly difficult May and June, that means total returns now come in at -0.5% year to date in high yield, representing a stellar turnaround when set against the near -2% of performance in the period to end June!

Corporate bond investors have had a difficult time of it, the first six or so months of the year haven’t gone as planned with spreads under pressure for the most part and supply at much lower levels than expected – Actually, we would argue that IG non-financial issuance has dropped to crisis period levels (just €122bn YTD). Still, spread markets are now exhibiting some stability and we are beginning to grind out a little tightening which is filtering through the whole corporate bond market.

We’re getting deals too – just as we thought we might. Bulgarian Energy did a €150m tap on Tuesday, on Wednesday we had Goldman Sachs and Prologis print, highlighting that the markets will be receptive to sporadic supply over the next few weeks for issues which are relatively easy to get away.

Chinks of light from primary

The primary market is in holiday mode, but that doesn’t mean it is completely closed. Blue chip borrowers, or those with a good name which require little credit work, can get deals away. There are still enough investors around to get deals placed. Bulgarian Energy on Tuesday was just a tap of an issue printed a few weeks prior, so required little additional investor effort for the additional €150m tap (may even have been a lead order to help this additional funding along).

On Wednesday, Prologis (a real estate logistics solutions group) issued €700m in a long 10-year at midswaps+100bp and having garnered a book of €2.2bn, managed to reduce the final pricing by a massive 30bp. That’s one deal per week win the last three from borrowers in the IG non-financial sector and €4.5bn only for this month. It’s the lowest level of issuance in a July month in at least 5 years and there is absolutely no way we are going to reach the average level of issuance for the full year seen in the 2013-2017 period. The supply metric for 2018 has been phenomenally poor.

As for senior financials, Goldman was back (having previously been in the sterling market), with a €1.5bn long 10-year, priced at midswaps+115bp. That takes the issuance to a very decent €12.6bn in senior financials for July. For the record, the high yield supply for this month sits at around €4.5bn.

What goes up, must…

It was obviously a defensive session ahead of those Juncker/Trump trade talks and especially so with the latter ramping up the rhetoric around his expectations. We gave back around half the gains of the previous session in equities, with the DAX lower by 0.9% and the FTSE by 0.6% with the US putting up a better fight of it, trading slightly higher – while having to take in a GM profit warning as steel and aluminium tariffs bite, as well as needing to manoeuvre that trade war with auto tariffs in focus.

Rate markets were relatively stable to slightly better bid for choice, the Bund yield edging to 0.39% (-1bp) in the 10-year and the Gilt to 1.27% (-1bp). The 10-year US Treasury yield also edged down to 2.94% (-1bp), with 2s/10s at around 28bp.

As for credit, the primary deal flow was a welcome distraction, in an otherwise light day in terms of activity. With markets elsewhere trading out in defensive fashion (weaker for the most part), we could have expected protection costs to rise into a better bid for default swaps. They didn’t and we seemed unfazed by the fall in stocks. As such, iTraxx Main edged lower to 65.0bp (-0.3bp) and X-Over moved 1.7bp lower to 285.9bp.

In the cash market, we edged similarly tighter, the iBoxx IG cash index 0.7bp lower at B+129.6bp which is the tightest level since the last week of June. As for the high yield market, we also edged tighter, and we closed out with the index at B+385.4bp (-1bp) to also the lowest level since mid-June.

We are reducing the frequency of our commentary in this holiday period, and as such, will be back on Thursday 1st August.

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.