13th January 2019

It’s been all too easy

iTraxx Main

80.6bp, -1.9bp

iTraxx X-Over

334.0bp, -3.3bp

🇩🇪 10 Yr Bund

0.18%, -2bp

iBoxx Corp IG

B+178.5bp, -1.3bp

iBoxx Corp HY

B+514bp, -3.5bp

🇺🇸 10 Yr US T-Bond

2.70%, -3bp

🇬🇧 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″]

Water set to get a little murkier…

The markets have broadly looked on the bright side in this opening week of the year, against most investors’ (and our) original expectations. Macro weakness has largely been ignored as we choose instead to focus on rate policy and get caught up on whether the Fed is done for the year, our any further hikes will be limited and/or delayed. Otherwise, little has changed to justify the upbeat tone in the market except that inflows into most asset classes need investing, so forcing one’s hand.

Equities might have just failed to rise in every session last week but had a good run nevertheless, rates were choppy in small ranges but look well-anchored having displayed a more defensive posture as we ended the week. IG credit curiously only widened while primary surprised to the upside. That’s a mixed bag suggestive of each market playing to its own tune as the classic and well-established correlations between them start to diverge.

The upcoming earnings season promises to be a difficult one judging by the plethora of weak updates of late. Those companies issuing warnings have seen their stock hammered. And this week sees the start of the Q4 earnings season proper – Netflix, Wells Fargo, Citi and JP Morgan amongst those due. The much-troubled US administration is picking fights on both domestic & international fronts, with temper tantrums on the funding of ‘the wall’ leaving the government shutdown to continue, while we are none-the-wiser on the US-China trade progress after last week’s meetings.

In Europe, the UK corroborated the evidence emerging from the Eurozone on the industrial slowdown with its own 0.8% declines in the three months to end November. And we know the weakness in the UK will continue given the announced layoffs by several auto industry players, for example, just last week. That is mostly to do with the fall-off diesel cars, but the slowdown China is also a big driver while some will point (wrongly) to the Brexit impasse as the primary reason.

Early borrowers catch the booty

Following much nervousness ahead of the new year as to how the credit primary market might evolve through what is usually a busy January (Q1) period, it appears that the apprehension was misplaced. It has obviously helped that equities have been in tip-top shape because the knock-on impact of the improved tone has been a boon for those early borrowers. The receptivity to most of the transactions has been excellent as evidenced if only, by the demand for them. And the higher the beta, the greater the interest. Performance on the break has been a little more mixed, however.

We previously noted that anywhere around the €20bn mark for corporate issuance this month would be a good result. That’s given the various risks in macro and geopolitics which would threaten to close the market for any length of time. At €10,350m of IG non-financial deal flow at the halfway stage for January, we’re on target for such a total. And last week was a very good one. We closed out Friday with Vinci lifting €950m in a 10-year offering at midswaps+93bp which was 22bp inside the opening gambit, and the ratchet tighter made possible by demand for the deal of €3.7bn.

Other deals on Friday saw the year’s first subordinated offering, which came from Abanca Corp Bancaria which offered €350m in a 10NC5 structure costing them 6.125%, and we also had the year’s first Reit offering from Digital Realty (delayed from last year) which took €850m in a 7-year Green issue costing midswaps+205bp (-25bp versus IPT).

The IG non-financial market delivered €9.1bn of deals and we would think that the dual-tranche €1bn offering from Fresenius was the pick of the bunch, managing to elicit an order book which was 7x subscribed. Orange SA’s triple-tranche €3.1bn transaction was the largest gathering last week (and this year so far for that matter).

Also busy in the corporate market has been the banking sector with €11bn of senior issuance in these opening skirmishes of the year, even as Friday last week drew a blank. And that also compares well against last January’s €21bn and, much to our surprise, we are possibly going to exceed that level.

Now it gets interesting

Lower oil prices might have been the driver for the drop in US CPI in December (-0.1% MoM), but the Fed will now see fit to embark on a more patient trajectory for further rate increases. Rates received a boost and went better bid, and pushed the 10-year Treasury yield lower to 2.70% (-3bp) with the Bund yielding the same maturity 2bp lower at 0.18%.

The potential for Brexit being delayed or not happening at all had Gilt yields edge higher (to 1.28%, +1bp, 10-year) and sterling strengthen a little. This week promises to be a real game-changing one on this front.

Credit protection costs resumed their decline with iTraxx Main managing to fall another 1.9bp to 80.6bp and X-Over lower at 334bp (-3.3bp). For the week, they were 8bp and 23bp lower, respectively.

In secondary cash, we had a slightly positive session for change, with the iBoxx index edging 1.3bp lower to B+178.5bp, leaving it 6bp wider so far in 2019. Within that, the senior financial index is 12bp wider this year (slightly better bid for choice last week) following much weakness in the opening few sessions. The high yield market was also similarly tighter, the index B+514bp (-3bp) amid little drama or activity.

Interestingly, subordinated financials have outperformed – Index spreads flat YTD, with much focus on the AT1 sector where some are thinking it is oversold, or into the current view that rates are anchored, selective SIFI CoCo paper is an attractive buying opportunity. After all, 7% yield to maturity isn’t to be scoffed at. The iBoxx CoCo index is 45bp tighter already this year, and has returned 1.5% already YTD!

That’s all ‘so last week’. This year’s first bit of drama is set to unfold as the Brexit vote gets under way, supposedly on Tuesday. And the permutations are several ranging from a new PM if the government loses by say 200 votes more to the EU coming to the rescue with something legally enforceable to stop a permanent backstop. There’s much in the middle of those two extreme cases!

UK markets will be on tenterhooks. The headlines are going to inject a high level intraday volatility into Gilt/sterling and UK equity markets. Sterling primary will be closed.

Away from that, the focus will be on the earnings season as mentioned previously, while Chinese trade data is going to give us a good idea auto how the US/China tariff situation is impacting flows.

Have a good day.

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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.