28th January 2018

Keeping everything crossed

iTraxx Main

42.9bp, -0.7bp

iTraxx X-Over

230.6bp, -1.9bp

10 Yr Bund

0.63%, +2bp

iBoxx Corp IG

B+84.4bp, -0.8bp

iBoxx Corp HY

B+265.3bp, -2bp

10 Yr US T-Bond

2.66%, +4bp

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″]

Best since 1987…

The markets continues to defy gravity and remain extremely bullish. The external trigger for a correction seems as far away as ever as we ignore any signs that we’re either overheating (or will be) on macro, or that political event risk will serve up a nasty surprise. They’re all situations which are difficult to position for noblest because any timing for an external shock or otherwise is an unknown entity.

So, instead we continue to feed the numerous asset bubbles and hope that when they deflate, that for the first time in history it will be all orderly! Policy makers are doing their utmost as the ECB continues to coax the markets with a pragmatic take on the Eurozone’s recovery, while the Trump tax reforms in the US serve to prop up global growth for this year.

With all that ringing in our ears, we closed out last week on the front foot. It’s actually been an extremely solid month for risk assets. Safe-havens and Bitcoin have been the losers. The Dow is up by around 1900 points (+7%) this month, the S&P index by around 200 points (+6.5%) and the Nasdaq by over 600 points (+7.5%). US equities are flying and already many are adjusting their year-end target – higher. Corporate bond markets are also having a ball.

IG continues to be largely bid only as cash-rich investors fail to get their fill in primary, while it is predominately the ECB lifting and squeezing the secondary market. IG spreads are at record tights.

It appears that few are chasing the high yield market. This market is tightening but it is underperforming, whilst the higher yielding CoCo bond market finds itself also bid only – but squeezing with some considerable out-performance. It’s almost as if this sector is the last bastion of the corporate bond market where we might be finding the final remnants of a bit of incremental value.

CoCo index spreads have tightened by over 70bp this month, which is a phenomenal performance by any measure and we can fully expect that trend – although not the pace of it – to continue, so long as equities ride high, there is no financial (banking) sector crisis and rate markets don’t sell-off overly aggressively.

Higher and higher into record territory

We all want some of the action. Incredibly, US equities set record highs with gains of over 1% for the S&P and Nasdaq, with the Dow not far behind. All of a sudden, 3,000 on the S&P doesn’t seem that far away (currently 2,872) after that near 34 point gain in Friday’s session. And for the Dow, dare we think in terms of a 29 – 30,000 context (currently at 26,616, having added 2,600 points since the beginning of December). They’re doing their level-headed best to talk the dollar down, swathes of corporate cash is being repatriated and investment is increasing.

GDP for Q4 might have come in at 2.6% and way off the 3% the market expected, but we’re quite sure a correction higher will follow and/or Q1 will correct materially higher. The market thinks some or all of that. We will be looking for a positive start to proceedings this week as European markets follow through playing catch up and add to their more modest gains of last week.

It was a case of ‘anything you can do…’ as credit markets also continued their squeeze amid a relative drought on the supply side, solid demand for paper and the feel good factor for risk assets being generated as macro ramps up and US equities surge. Last week only saw just 3 IG non-financial deals for a total of €1.6bn and for the month we’re up at just €17.1bn which compares unfavourably with the €26bn in January 2017.

The iBoxx IG cash index closed at a new record tight level of B+84.4bp (-0.8bp) and through the B+85bp year-end target we had set. That’s 12bp of tightening this month and 3.65bp last week. Returns at the moment are slightly negative for the month owing to the weakness in rate markets.

The CoCo bond index also edged a touch tighter, by 2bp to a new record low of B+288bp (-75bp YTD and 10bp tighter last week). Elsewhere, the HY market was also squeezing tighter, but with little of the impetus we might expect from soaring equities as secondary activity remains fairly dull. Still, we tightened 2bp to leave the iBoxx index at B+265bp which is just 11bp away from the record tight set in early November. Nordea was the sole borrower in the session, taking €275m in a 5NC2 offering priced to yield 6.50%.

Not to be left out, the sterling corporate bond market is also seeing a huge squeeze. Supply has mainly come from financials and some high yield issuance and we have an investor base bereft on any IG deals to absorb their cash piles. The iBoxx index tightened to G+118bp at the end of last week, leaving it a massive 13bp tighter already this month although returns are at -0.3% as a result of the sell-off in Gilts.

Busy week over month-end

Yellen: Signing off

There’s a busy week ahead. The FOMC will dominate but is not expected to move on rates, while Yellen’s term as chief ends on the 3rd Feb. Non-farms wraps up the week with 178k additions expected, while the hourly earnings increase will be closely watched. Trump makes his first State of the Union address to Congress.

In Europe, we have the region’s GDP (Q4 expectations 2.6%) and latest inflation data, with the core number watched closely (1.0%?). Finally, we’re in the belly of the earnings season, with the likes of Apple, Amazon, Facebook and Microsoft all due as the tech sector takes centre stage.

We shouldn’t expect primary markets necessarily to flourish given the Fed meeting and non-farms will naturally lead to lighter sessions from an activity perspective. There’s little reason though to think that markets will not be as positive as they have been of late, although some of the moves we’re seeing are unlikely to be repeated at the same rate. We think!

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.