7th January 2018

It’s getting better all the time

iTraxx Main

43.5bp, unchanged

iTraxx X-Over

221.5bp, -2.4bp

10 Yr Bund

0.44%, unchanged

iBoxx Corp IG

B+91.9bp, -1.5bp

iBoxx Corp HY

B+275bp, -1.4bp

10 Yr US T-Bond

2.48%, +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″]

Simply euphoric…

What could possibly go wrong! As far as halcyon periods for credit go, this last decade has been up there as the stand-out one. We are likely going to power ahead for this first quarter. And there is little need as such to alter course. Friday’s non-farm payroll report might have disappointed some in the market, as the 148k December job additions came well below expectations of 190k, but credit market participants and anyone else who might be concerned about funding costs/central bank liquidity withdrawal will be dancing a jig. The report was, quite simply, good for credit.

The unemployment rate remained unchanged at 4.1% while wage growth edged up to 2.5% year-on-year. The Fed will raise rates as expected, likely three times – perhaps even four – but they will come with a high degree of caution. Market rates will not be going to the moon on the back of these important releases. That was borne out in last week’s final session with equities higher again and new records set in the US and UK, rate markets didn’t move much caught between the headlights in a way, and credit spreads tightened up some more rounding off a super opening week for the markets.

So it all works still for corporate bond markets – we have ‘improving’ levels of global economic growth, inflation remains subdued, rate markets will be left to trade in tight ranges, while there’s some event risk lurking as ever but not enough to scare us (yet). Higher yielding assets are going to be worth their weight in gold, if they are not already. Credit will remain better bid and the compression between high and low beta risk is set to continue. The near term trade is going to see high beta outperform – namely high yield corporate risk, the AT1 market and longer duration credit.

It works too for equities. Dollar strength and periods of weakness will dovetail with generally higher European stocks and only limited periods of weakness as the improving economy buttresses corporate earnings. We have records in US and UK equities, and there is now a push which might see European ones dragged higher (even if the euro strengthens a little versus the dollar) – and into record territory. Even Bitcoin made a comeback after a two-week lull which saw it trade off a $12,000-handle, now up at almost $17,000 per coin, at the time of writing.

Equities hot streak continues, credit sets new records

So while Bitcoin found some support and rallied, the main focus of attention was on US equities. They rallied hard in the session, to set new closing record highs with the S&P at 2,743, the Dow at 25,295 and the Nasdaq at 7,136 – and all higher by 0.7% or more on the day. In the UK, the FTSE was also busy setting a new record high, up 0.4% in the day.

The corporate bond market wasn’t to be left behind. The early year buoyancy around risk assets saw to it that spreads across the board were pushed tighter as well. First, investment grade. The Market iBoxx IG cash index ratcheted tighter by 1.5bp to a new record low of B+91.9bp, some 5bp tighter in the week. Our year-end target of B+85bp is most definitely now far too conservative.

The corporate high yield market only edged tighter, probably seeing less interest because it is illiquid and mainly has interest when we see new deals – of which there were none last week. It might also be seen as being a little too rich, but whatever the reason, interest in it was limited.  The index only tightened by 1.4bp in Friday’s closing session and was marked at B+275bp, 11bp tighter in the week. Still, the high yield market is up 0.5% (total returns) in the week.

The plaudits yet again, though, go to the AT1 market, where the demand for product remains robust and the market resolute with investors continuing to scurry for higher yielding product for what they might see as a sure thing! Into an economic recovery and a normalising trend (albeit long-winded) of policy rates, the banking sector’s fundamentals are only going to improve.

And so this ‘designed to fail’ product (let’s not have that lost on us) is going to be in vogue so long as valuations are high enough to give investors enough of a yield pick up versus other fixed income assets.

The CoCo index closed 5bp tighter in last week’s final session, was 22bp tighter in the week and now resides at a record tight level of B+340bp. This market has already returned 1.1% in the opening week! And to think that the index has almost halved in a year and is over 700bp tighter in the last 24 months – there is still more to go. Alas, the index yield dropped to a new record low too, at 3.22%. Time for some issuance!

In the synthetic space, S28 iTraxx Main actually closed (strangely) unchanged at 43.5bp and underperformed iTraxx X-Over, which edged 2.4bp lower to 221.5bp.

And for this week…

Who cares! Well, not quite. We have US inflation data for both producer and consumer prices with signs for any pick-up eagerly eyed given the impact it will have on Fed policy. December retail sales are also due. We also have the fourth quarter’s earnings season ahead of us, with JP Morgan, Wells Fargo and Blackrock among others due to report.

The primary market should also perk up a little more and borrowers other than auto manufacturers ought to be on the tapes. Renault, BMW and Daimler added €3.75bn in the opening week, while we had several issues in the senior bank market alongside a plethora of covered bond issues. The high yield market was closed as we might have expected but the upbeat mood should see this market open soon enough and we are looking forward to seeing some AT1 supply (for the full year perhaps close on €30bn).

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.