8th March 2018

It wasn’t supposed to be like that!

iTraxx Main

51.8bp, -1bp

iTraxx X-Over

258.5bp, -4.8bp

10 Yr Bund

0.63%, -3bp

iBoxx Corp IG

B+92.4bp, -0.7bp

iBoxx Corp HY

B+308.7bp, -1.2bp

10 Yr US T-Bond

2.86%, -2bp

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″]

Judgement day warms the cockles…

ECB judgement day usually ensures an uneventful session. And that’s what we almost got. Because the ECB communique saw a removal in the ‘easing bias’ language – and it generated a high level of excitement! Rate markets sold off. Then they recovered as Draghi’s warning to risks from import tariffs helped rate markets swing the other way. We still don’t think they will completely remove the QE purchases come September, but for sure, there will be another reduction in them thereafter.

From €60bn to €30bn as it is now, we could expect them to drop to €15bn for a further period of time (six months) before they do away with them completely. Anyway, the initial excitement turned to apprehension as Draghi cautioned that the outlook was sullied by the potential for trade wars. Rates were better bid, lower yields and a drop in the currency meant higher equities. All that in an hour.

Prior to the announcement, the market was believing that the ECB was not going to furnish it with anything new, save for some dovishness into the potential tariff wars and to a lesser extent around the ongoing Brexit machinations. And the news flow elsewhere had us greeted with that unexpected and large drop in German manufacturing orders which declined 3.9% in January month-on-month. Some will explain it away as a blip, preferring to look at the longer term history which does paint a picture which is more rosy.

Corporate bond markets will be rooting for some of those occasional blips as that ensures a more steady recovery pattern and might serve to support spreads and returns (a little) for another year. However, the import tariff situation was due to be aired later in the evening following a meeting at the White House, and Trump’s latest tweet did seem to strike a more conciliatory tone. The market view was mixed, though. Safe-havens were better bid as were equities, in what seemed to be a case of hedging one’s bets?

€2bn for Goldman Sachs

We did see some primary activity with Belfius Bank and Goldman Sachs issuing subordinated and senior debt, respectively. The former issued €200m in a 10NC5 Tier 2 issue priced at midswaps+123bp (-7bp versus IPT) off books at €400m. Goldman took €2bn off a €3bn subscribed book, for a 2.75NC1.75 floater priced at Euribor+45bp (-5bp versus IPT). Neither deal was exciting, but that was to be expected given the day’s central bank event, which was to follow.

The high yield market threw up a deal from Nordic buildings group Stark, which printed a dual tranche transaction. The €250m 6NC2 senior secured tranche came with a 5% yield while the €265m 6NC1 floater was priced at €+462.5bp – and both were comfortably inside the opening price talk. The issues took us through €10bn YTD.

The year-to-date senior supply is going at a good clip, and is now up at a stellar (by post-crisis standards) €39.25bn. There was nothing in IG non-financials in euros, although the sterling markets were being entertained with deals from Southern Gas Networks (£400m, 18.5-year, Gilts+127bp) and housing association group Optivo (£250m, 30-year, G+140bp).

That was it for the corporate bond market in the session, where secondary was light with just the usual odd bits of business being transacted, and the ECB being the predominant buyer of choice. Who else!

ECB almost leaves it unchanged…

To the ECB who left the refinancing rate at zero and the deposit rate at -0.4%. The monthly QE purchases are at €30bn. But the central bank did raise its 2018 growth forecast to 2.4% (from 2.3% as predicted in December), while leaving the forecasts for 2019 and 2020 unchanged at 1.9% and 1.7%, respectively. The 2018 inflation forecast of 1.4% was maintained, but the 2019 forecast was revised lower to 1.4%, from 1.5%,

The market will have been cock-a-hoop over the view that the ECB is feeling satisfied with itself that the job of stabilising the financial system and laying some solid foundations for which growth can recover is finally nearing its end game. Policy normalisation beckons and perhaps mid-2019 will be a reasonable ball-park enough of a date for the first rate hike. It’s been a long 10 years.

We don’t believe that the news will have much of an impact on the corporate bond market. The €5-6bn of QE-related IG non-financial bond acquisitions are going to continue for another six months. So whatever impact they’re having on the spread markets (not entirely quantifiable), we think that stays unchanged. For us, that means stay with IG, add CoCo for the extra yield, whilst retaining some exposure to high yield, adding only through primary where pricing ought to be a little more favourable.

Everyone’s a winner

The euro was particularly volatile, seeing $1.2446 before ending closer to $1.23 the figure – again up and down on the back of that press conference. But we did close out with the equity market in Europe higher by up to 1%. The US markets were awaiting the results of the ‘tariff meeting’ and were mixed into it with a late rally into the close.

In the rate markets, there was a clear bid for paper. The 10-year Bund yield was 0.63% (-3bp) having seen 0.70% during Draghi’s press conference. Gilts were better bid on headline risks as a result of Tusk’s musings about Ireland/Brexit as he predictably played hard ball, the yield on the 10-year down at 1.48% (-2bp). The 10-year US Treasury yield was left lower at 2.85% (-3bp). Interestingly, Italian yields are creeping lower as a bid for BTPs emerges. The markets have brushed away concerns that a new government might be more disruptive than promised. The 10-year played out in a yield range of 1.97 – 2.08% and closed 4bp lower at 1.98% (-12bp since before the election).

In credit, we had the iTraxx indices better offered, such that Main was down at 51.8bp (-1bp) and X-Over was 4.8bp lower at 258.5bp with the risk-on tone filtering throughout the market.

The cash market was quiet as we might have expected, but the Street did serve to tighten up spreads. As measured by the Markit iBoxx index, the IG cash index was 0.7bp lower at B+92.4bp in a broadly better session which saw the CoCo index 5bp lower at B+329bp – which is 33bp tighter this year.

Finally, in the high yield market, and the direction of travel was the same. Low flows and volumes and a bit of primary made for a slightly better day and the market was marked tighter into that improved tone. It all left the Markit iBoxx HY cash index at B+308.7bp (-1.2bp).

Just into the close, Trump announced that he was sticking to his 25% steel and 10% aluminium tariff regime due to come into force in 15 days, but exempting Canada and Mexico while potentially sparing other countries. The fun and games are just about to begin. That’s it. Non-farms and the EU’s reaction are up next.

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.