30th April 2019

It rarely gets much better

iTraxx Main

58.0bp, +0.3bp

iTraxx X-Over

249.0bp, +0.8bp

🇩🇪 10 Yr Bund

0.02%, +2bp

iBoxx Corp IG

B+121.7bp, -1.5bp

iBoxx Corp HY

B+398bp, -2bp

🇺🇸 10 Yr US T-Bond

2.51%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Corporate bonds racing ahead…

January, February, March and April gave total return performances in euro-denominated IG credit of +1.1%, +0.7%, +1.4% and +0.7%, respectively (source: Markit iBoxx). For the year to date, it’s +3.9%. Who would have thought? That’s an extremely neat and tidy start to what was probably seen by many as going to be a difficult, if not transitional, year for the corporate bond market.

Instead, growth fears have played into the hands of the market and made it look like 2016/2017 all over again. In high yield, the numbers are better and belie (or feed into fears of) macro weakness – amid expectations of a Goldilocks economic scenario. The numbers emerge as +2.1%, +1.8%, +1% and +1.3% of monthly total returns in January to April, with the opening third of 2018 delivering an excellent +6.2% of performance.

So as we head into May, credit has stacked up some excellent performance across all product sectors. The CoCo sector has delivered some 7.4% in total returns as the demand for higher-yielding debt amid that crunch lower in rates earlier in Q1 has maintained underlying yields at low levels. We think that there is every opportunity that we’ll continue to hold on to these gains at a minimum, and quite possibly a spread squeeze over the next couple of months, at least, and continue to garner some performance upside before we enter into the summer lull.

Benchmark investors will also be sitting very pretty, especially as most will be running a portfolio with excess beta. IG spreads (iBoxx index) are 50.5bp tighter year to date, HY spreads are 124bp tighter and CoCo spreads have tightened by 175bp.

There’s also a very interesting sterling corporate bond market where iBoxx index spreads in IG have tightened by 37bp and delivered total returns of 4.0%. That’s an excellent performance too, especially with all the potential for volatility (which we didn’t quite see) on Brexit fears, while demand for primary has been as good as it has been in the euro-denominated corporate market.

Equities, though, have done even better – just as the S&P has seen a new record close. A deal between the US and China on the tariffs – if it materialises – will give all risk assets an additional shot in the arm and rising equities will drag other markets higher. In credit, spreads would tighten while rates might back up as imminent fear of macro event risk fades.

As we close April, the year to date performance in the Dax has that index higher by 16.7% (and it is a total return index), while the FTSE has managed to come up with a year to date gain of 10.3% with the US markets just managing to edge out in front. The S&P500 set record index highs in the month, with performance up by 17% this year.

Primary IG slowed, HY picked up the pace

The pace of IG non-financial issuance slowed markedly in April, but picked up – as it needed to – in the HY market. Spreads across the whole market continued to squeeze. That, in itself, shows both the risk-on nature of the markets as well as the solid demand side of the equation. There is clearly plenty of sidelined cash – and more coming into credit funds – looking for some of that aforementioned performance.

IG non-financial drew many blanks on the deal flow front after the second week of April, with just three borrowers (4 tranches) for €2.6bn in the market. That came after €10bn in the opening couple of weeks. We can’t blame it all on the later Easter break, or the earnings season. The high yield market saw a marked step up in deals after all. So we are closing out April with just €12.7bn of IG non-financial issuance – which is short of last year’s April total of €14.5bn. The YTD figure stands at €97bn (versus a much-reduced €70bn for the corresponding period last year) and we would think puts us on course for somewhere in the area of €240bn – 250bn for the full-year (€221bn last year).

The high yield market perked up though in April. We had almost €10bn issued (€11.4bn for the same month in 2018) from 21 tranches – although that includes hybrid deals from borrowers whose senior ratings were IG. We’re up at €20bn year to date (versus €30bn in the corresponding period last year). We have a good opportunity to build up a decent tally of deals through May and June if the markets remain kind, before the seasonal lull sets in during the summer months.

For the full-year? We are probably needing to increase our expectations of €45-50bn previously, a little higher. Getting to last year’s €62bn though might be a stretch.

Senior financial issuance has also had a very good month with supply coming at €18.5bn and that total is in excess of the €12bn issued in April 2018. For the year to date, we sit at €61.5bn and are heading for €140bn – €150bn, although that would be the top end of our forecasted range.

No strategy changes needed into May

We woke up to another set of weak Chinese data in the session. The manufacturing PMI for April slipped to 50.1 versus expectations that it would hold steady at 50.5. The Caixin survey also saw slippage, coming in at 50.2 in April versus 50.8 in the previous month. There’s resilience there, but overall the weakness reflects the continued global slowdown with near-term recovery proving elusive.

Italy: Back to growth

The looming May Day holiday across many parts of Europe made for a quieter session and we didn’t even seem to get too carried away with the Alphabet (Google owner) earning’s miss. Helping to stymie the downside, we had a better-than-expected Eurozone GDP print for Q1, showing a nice rebound to 0.4% from 0.2% in Q4, 2018. Further, Italy emerged from recession in the quarter too, as its economy grew by 0.2% (estimates were for 0.1%) against -0.1% in Q4/2018.

So a mixed set of macro data and whilst the 0.4% figure was better than we had expected, there is little sign that we are going to be breaking higher in growth terms anytime soon. So we are set up for May and June to play out much the same way as we have for most of this year. Investors and policymakers will remain apprehensive, concerned and fearful.

That means credit investors can retain current positioning biases, running a higher beta portfolio knowing that rates are staying low and that the demand for safe-haven higher-yielding assets (corporate bonds) will stay intact. We won’t need to be bothered about the potential for outflows either. More the point, we can expect continued inflows. Supply is needed to stop us from crunching tighter in secondary.

Anyway, during the final session, the issuance came yet again from the banking sector. IG non-financial corporate issuance drew another blank. Bank of America came hot on the trails of Citi, Wells and Morgan Stanley earlier this month with a dual-tranche offering of its own raising €2.5bn combined in an 11NC10 and a 7NC6 offering priced at midswaps+87bp and midswaps+67bp, respectively (18-22bp tighter versus IPT). They were followed by Banco Sabadell, which came in senior non-preferred format for €1bn in a 5-year maturity at midswaps+175bp.

The day’s earnings stream was a good one. Pfizer, MacDonalds, Merck, KKR and GE all beat. The Dax finally ended a touch higher after a mixed session dipping in and out of the red, the FTSE closed slightly in the red and the US indices were flattish, as at the time of writing.

European rates sold off on that GDP news, but managed to recover a little thereafter but the benchmark 10-year yield still closed 2bp higher at 0.02%, the equivalent Gilt yield was up at 1.18% (+3bp) and the 10-year Treasury closed to yield 2.51% (-2bp).

The synthetic credit index closed with little doing. iTraxx Main closed 0.3bp higher at 58bp and X-Over was 0.8bp higher at 249bp (all noise in a quiet session).

In the cash market, the IG iBoxx index closed at B+121.7bp representing 1.5bp of tightening amid another squeeze in spreads and a sector parched of any new issue deal flow. It’s the tightest level since May 2018. The IG index yield closed the month at 0.97%, 11bp lower in the month and closing in on that ECB corporate QE record low of 0.83%.

Finally, the HY market was also experiencing a bit of a squeeze, with nothing priced in primary in the session. We closed the day with the index at B+398bp (-2bp) meaning the index tightened by 41bp in the month.

Have a good day.

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.