12th November 2017

If it was just that easy!

iTraxx Main

52bp, -0.5bp

iTraxx X-Over

244.3bp, +1.8bp

10 Yr Bund

0.41%, +2bp

iBoxx Corp IG

B+97.6bp, +0.7bp

iBoxx Corp HY

B+275.7bp, +9bp

10 Yr US T-Bond

2.40%, +7bp

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=”10″], [wp_live_scraper id=”11″]

Defeat from the jaws of victory…

We came into last week on such high expectations that spreads would continue to squeeze tighter, but we were completely wrong-footed. Not because there was any measurable or obvious better selling cares, or that we had a credit market related event that scuppered those expectations.

Nor was it that we had so much issuance that a back-up was always likely into it. We were wider because the equity markets were a little more volatile and lower in most cases through the week. Again, there was no obvious reason why that was so (maybe US tax reform delays?), except that valuations for equities are a little lofty at the moment and we were lacking a catalyst/trigger to help them push on.

Whatever, high grade credit – as measure by the Markit iBoxx index – saw cash 2.3bp wider, just when we were a basis point away from reaching a record tight for this index. High yield spreads rose from their record lows to close the week 21bp wider (most of it coming on Friday), amid just a few deals in the week in primary. And the stand-out sector this year, the CoCo market, also saw some weakness with spreads around 31bp wider on an index that had seen record lows as well.

They are big moves for the higher beta markets, but they are also relatively small ones given how much performance we have managed from the tightening seen over the past 11 months. And in a sense, corporate bond markets did outperform. They exhibited none of the volatility or apprehension besetting the equity markets or any of the uncertainty afflicting the rate markets. We know our story – new issues dominate, the ECB is lifting paper, secondary liquidity is non-existent and we are totally frustrated at the level of the market (yield and spread).

There has been no panic, no rush to reduce risk, but any selling cares into a generally negative market tone are usually met with a defensive bid exacerbated by the poorest of secondary market conditions. We remain optimistic but we might need equities to maintain a broadly positive bias. We don’t believe we have seen this year’s tights. That means there is  a good chance that the tightening trend can resume. In the meantime, we are cock-a-hoop with the performance this year from all segments of the corporate bond market, which have delivered way in excess of expectations.

Primary sparkles

The new issues markets exploded into action last week with deals from all sectors taking in SSAs, covereds and all areas of the corporate market. IG supply, in our view light of late, saw €11.08bn of supply last week with BASF’s €3bn 3-tranche offering the largest. It takes the total year to date to €240bn, making this year the best since 2013. Deals continue to come cheap to the curve even after pricing is tightened, although the secondary curve of just about every borrower has been distorted by the ECB’s QE purchases.

For borrowers, their funding levels are fantastic. For investors, we just have to grin and bear it. The market is tight in historical terms, while the catalyst for a reversal is not obvious with the path of least resistance suggesting corporate bond market valuations are going to stay rich.

In HY, it was a slower week, but the market still dished up €1.35bn of deals and the annual record continues to rise, to €65bn now. We’re looking at close on €70bn before the year is out.

But it is not over yet

We closed out last week in weak form. And much is going to be made of the pull-back in spreads off those historic lows. But in a sense, Friday’s weakness was a delayed one from the previous session. That was reflected in the iTraxx indices where reactions are more immediate. Main actually closed 0.5bp tighter at 52.0bp while X-Over edged a couple of basis points wider to 244.3bp – most of the big weakness came into Thursday afternoon’s session.

Nevertheless, the 21bp of weakness in high yield, as highlighted previously, is a lot – but comes off the back of a weak equity market backdrop and poor secondary market liquidity – and a non-compliant Street (as ever). The poorest of bids into weakness, no offers into strength. At B+275bp, the HY iBoxx index is still a massive 140bp tighter YTD. Returns easily sit at over 6% and primary’s record €65bn of deals this year have generally been taken down well. Few are complaining.

In IG, the weakness was much more moderate, as we might expect for a low beta product and the iBoxx index is now at B+97.6bp and the couple of basis points of weakness came amid very low levels of activity. The week’s primary issuance was fairly heavy although we were absent a deal of any kind in IG markets on Friday, which is usually the case.

The contingent convertible banking market had a torrid time of it – if we look at in isolation as spreads have backed up some 40bp from record lows seen just over a week ago to B+391bp. No panic – just a victim of illiquidity – and the index is still 270bp tighter this year with returns sitting at around 17%.

Some stability in equities, macro maintaining its positive bias, Trump returning to the US without having upset too many in Asia and the markets will hopefully stabilise. Tax reform in the US looks set to be watered down and/or delayed, but that in itself will likely act as a drag on the markets upside.

This week we have US retail sales and inflation data for October (ahead of the crucial Thanksgiving shopping period), while Yellen and other Fed speakers are slated to give various speeches. We have Eurozone GDP, industrial production, carious inflation gauges in a fairly busy week on the data front in Europe.

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.