10th December 2017

Kicking the can down the road

iTraxx Main

47.3bp, -0.7bp

iTraxx X-Over

231.6bp, -2.4bp

10 Yr Bund

0.30%, unchanged

iBoxx Corp IG

B+98.6bp, -0.1bp

iBoxx Corp HY

B+301.6bp, +1.5bp

10 Yr US T-Bond

2.38%, unchanged

FTSE 100

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S&P 500

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Fixed income party slows

It has been a fairly uncertain month up until now. We are past the non-farms report for November which turned out to be fairly mixed as the number of job additions of 223k beat expectations of 200k, but hourly wage growth of 0.2% didn’t (0.3% expectations).

We have the FOMC up next with a 25bp all but a nailed-on certainty. The US tax reform situation is ongoing. There is reason to be cheerful – and not just because it is almost Christmas. Still, we ended last week with some breakthrough on the Brexit negotiations while the US employment data suggests inflation will stay contained for the foreseeable future. Rate rise expectations therefore have every reason to be moderate through 2018 (three possible hikes in the US, nothing in the Eurozone and likely nothing doing from the BoE).

The corporate bond party isn’t over yet, and we’re not looking to the second half of 2018 as being some vague period for when the wheels start falling off the bus.

The 10-year Bund yield seems to have found an anchor at 0.30%, US Treasury yields are firing blanks with the 10-year stuck at below 2.40% (now at 2.37%) while any volatility in the UK barely sees the 10-year Gilt yield break above 1.30%. Secondary credit has had a more sedentary time of it, playing out in range-bound fashion amid the lowest of flows and volumes and where the ECB has been the biggest single player in that market (for the past 20 months). Primary recovered strongly in the second half of this year with high yield markets gushing as the rush to get the backlog of deals away got going.

The receptivity to deals has been excellent across the board, but more so for higher beta ones, going all the way down the capital structure. Nordea, for example, printed the CoCo with the lowest coupon (3.5%) while on Friday last week, we had a rare PIK deal from Burger King.

We have higher, sustainable growth around the corner, supposedly. That is, macro is on the up. And we have higher rate regimes coming as a result of it. But the markets are telling us something else. Or at least investor behaviour is, because the demand for fixed income high yielding debt is undimmed, low beta deal barely offering any pick-up against the risk free rate. That risk free rate is still well bid across all jurisdictions  – Gilts, Bunds and Treasuries – on Brexit, ECB buying and low inflation (?), respectively.

Brexit on the back burner

Kicking the can down the road is a phrase oft used since the financial crisis began. It took in the Greek debt crisis, while now it seems that the result of the Brexit negotiations was to come to some kind of fudge amid very broad agreements – and then to argue the detail later. It’s politics after all, and the EU has great form on it. So we can move on from Brexit for a while, and focus on the Germans attempting to get a government in place and those US tax reforms as they work their way through the legislature.

So, it’s crisis averted and we saw some sort of relief rally leaving the FTSE 1% higher in the session and Gilts reverse some of the gains in the previous session to leave the 10-year yield at 1.28% (+3bp).

The good payroll report didn’t feed through into high Treasury yields and the 10-year was unchanged at the close at 2.38% while the 2s/30s was unchanged at 97bp. It would seem that the miss in the hourly wage rise was enough to curtail any weakness in Treasuries, highlighting concerns around the lack of inflation in the US.

In Europe, Bunds were slightly better offered for choice leaving the yield close to unchanged at 0.305%. Equities rose smartly and ended the session 0.8% for the DAX with other bourses less ebullient, but all in the black.

Credit closed in secondary

€260 million worth of deals for Burger King

The primary markets offered up only the PIK deal from Burger King, as it took €200m at 8% and tapped the existing 2023s for €60m. The deals were enough for the high yield market to reach a new landmark, issuance of €75bn for the first time ever in the euro-denominated high yield market. There is still life in this market for another week or so with several deals set to get away.

The IG market delivered a zero to leave the annual total for IG issuance at €265.5bn. We look for some deals this week although the ‘official’ pipeline is bare. There is unlikely going to much next week.

The better tone in equities and more generally across the market helped protection costs to move lower. iTraxx Main closed at 47.3bp (-0.7bp) and X-Over was 2.4bp lower at 231.6bp.

There was nothing happening in the cash market, and we closed yet another session unchanged. The Markit iBoxx IG cash index closed at 98.6bp and was unchanged in every session last week. The sterling corporate bond market got bit of a boost on the Brexit developments and spreads ended 1.6bp tighter in the week, all the performance coming on Thursday and Friday with the iBoxx index at G+135.5bp. In the high yield market, we actually edged 1.5bp wider to B+301.6bp and that represented a widening of 9bp in the week.

As for this week, the Fed should deliver a 25bp rate hike on Wednesday, the ECB will stay pat on Thursday and the BoE will also leave rates unchanged (MPC meets Wednesday). There is the EU Brexit gathering on Friday where they are expected to approve the deal made last week and agree to move on to the trade/transition talks.

On a housekeeping note, the ‘funds performance’ tables to end November are complete and updated.

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.

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