14th February 2018

Let the good times roll, again

iTraxx Main

54.8bp, -2bp

iTraxx X-Over

273.6bp, -8.6bp

10 Yr Bund

0.76%, +0.5bp

iBoxx Corp IG

B+89bp, +0.4bp

iBoxx Corp HY

B+309bp, +2bp

10 Yr US T-Bond

2.91%, +7bp

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″]

Crisis? Not yet it isn’t…

We have economic recovery. European equities opened higher across the board and rate markets were slightly better bid, leaving credit in a better spot too. Eurozone GDP growth numbers warmed as the region fed into the global growth story and we finally have clarity of sorts – or the beginnings of a greater sense of purpose from the UK Government – about taking the Brexit debate forward.

The last fortnight’s volatility has almost been forgotten. Well, we should be looking on the bright side. The shock that the growth story has legs in it has been felt. Rate markets look like they have adjusted yields higher. Equities have reacted to those higher rates, credit felt some more material weakness in Tuesday’s session after some solidity in spreads, but the ebb and flow of the markets overall adjustment should now be settling into a less volatile pathway.

In credit, the primary market continues to splutter. Wednesday’s session just had a deal from ANZ leaving us with a real sense of famine on the issuance front. Mandates continue to be awarded, and there is obviously a decent pipeline building. Maybe borrowers are being told that the market is nervous and they should hold fire with their deals until we get an extended period of stability in equities. Certainly that nervousness might be seeing investors being more disciplined with their order limits.

As we mentioned on Tuesday, the Beni Stabili deal was tightened by the now almost obligatory 12bp – but on a poor book and it is trading wider than reoffer. It’s far too early to suggest that we have a ‘sea change’ in investor thinking, but it’s a certainly a ‘pause for thought’. And that’s how it should be when the going gets a little difficult. The good ‘ole days are not behind us… we’re a fickle bunch, and a couple of good names in the right maturity with some tightening on the break, and the tide will turn again.

We’re not looking for something more sinister than that. As we have suggested in numerous previous comments, the corporate bond market should be better bid into this part of the cycle (even if we are late into it), and will react late once any downturn materialises. The severity of the downturn will dictate how much weakness hits us.

And that must be 2019’s story. We continue to like IG, we like contingent convertibles as a means of getting some spread/yield on board, and although would be a little more wary about high yield because of the richness in valuations, well-priced high yield primary is the obvious entry point.

Higher than expected inflation hits Treasuries

The markets are so fearful of inflation, that a higher than expected print can derail any bullish tone of any day. It tried to on Wednesday – and did, but only momentarily. European stocks though eventually ended 1% or so higher in a fairly whip session.

That US core inflation number for January of 1.8% was unchanged from a year earlier, but because the market expected a drop to 1.7%, it was enough to see a sharp reversal in the US equity (futures) markets. Retail sales missed forecasts, just to confuse the picture. Hopes that the US markets would open in the black were immediately dashed. Nevertheless, US equities were fighting back during the session and rose smartly with gains of up to 1.5% intraday.

Adding to the mixed picture, rates sold off in the US, the 10-year US Treasury yield crunching higher to 2.91% (+7bp) but it only managed to drag Bund yields up a little to 0.76%, while Gilts yields closed up 2bp at 1.63% (both 10-year). That US Treasury yield is now at the top end of our forecasts for the full-year, having risen by over 40bp already this year. Of course, everyone will be looking at 3.00% as the next stop. Quelle.

Soon enough, the booming shale sector, with oil gushing in the US at record levels, will act to dampen inflation levels and will be felt into the coming (2019) cyclical slowdown. We might be getting ahead of ourselves in terms of inflation expectations partly as a result, although that won’t play into the Fed’s decision on rates this year, with three rises still anticipated.

Little happening in credit

The only corporate deal in the session was a sustainable bond offering from ANZ for €750m in a 5-year maturity at midswaps+15bp (-7bp versus IPT) and it took the monthly total for senior issuance to a paltry €1.75bn. There was nothing else save for a covered bond deal from Deutsche Bank. So the primary market’s poor level of activity for the month continues.

That aside, with equities in upbeat mode, at least we saw some recovery in the synthetic space with Main 2bp lower at 54.8bp and X-Over regaining around half to Tuesday’s losses, down 8.6bp to 273.6bp.

The Markit iBoxx IG cash index closed at B+89bp (+0.4bp) in yet another session where the market was slightly better offered. With so little activity going through and primary offering very little, it is very difficult to gauge where the market really is in terms of mood and direction. At least the contingent convertible market was a tad better, but the enthusiasm (and offered side liquidity) left much to be desired.

Finally, the same picture was seen in the high yield market, with the market slightly better offered, the Markit iBoxx index left at B+309bp (+2bp).

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.