23rd June 2019

Let the music play on

MARKET CLOSE:
iTraxx Main

53.7bp, unchanged

iTraxx X-Over

254.8bp, +3.4bp

🇩🇪 10 Yr Bund

-0.285%, +3bp

iBoxx Corp IG

B+125bp, -2bp

iBoxx Corp HY

B+417.8bp, -1.5bp

🇺🇸 10 Yr US T-Bond

2.06%, +6bp

🇬🇧 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″]

Fill your boots…

There’s nothing delicate about it, but we are nicely poised to finish off the first half of the year with some style! Into the final week of the first 6 months of 2019 and it’s been a boon period for contrasting – and not always the right – reasons, for all asset classes. The global economy has a sickly feeling about it and awaits the next stimulus measure to help it to the next appointment, whereby likely yet another dose of medicine will be administered. Everything else feeds off it.

The Dax has outperformed – and fixed income hasn’t been too shabby, either

The Dax is up almost 19% and the S&P500 has risen by around 17.5% (setting record highs for the S&P/Dow in the process) but there is also a great story in fixed income. We struggle to find a time when Eurozone bonds (iBoxx index) have returned, in any period, anywhere close to 6% – let alone exceed that number. In credit, the AT1 sector takes the plaudits, with returns for this highest beta of products at a stunning 10% year to date (index 190bp tighter), and 4% this month alone.

We can suppose that we’re in last chance saloon territory in some respects. But, there is no point in selling at the moment, where else to put the money? The markets – fixed income anyway – have commoditised and once they hit rock bottom, they will just stay there. Next up, the Japanification of the markets means we just trudge along some (yet to be established) bottom, threatening at times to break free and out of the doldrums, only to find that we can’t.

The high-level restructuring needed (at the political level) isn’t going to come. The malaise is here to stay, hence Draghi’s continued frustration at the political class’ inaction on the matter. No one wants the extra pain or worse, be voted out of office. So the message is, buy the highest beta product one’s investment portfolio allows, sit on it and clip the coupon and enjoy the returns – until at maturity we roll into the next one.

With all that in mind, we don’t think anyone is going to change tack and reduce risk exposures. There could be a fair level of performance give up in that move. The 10-year Bund yield is now through -0.30% and must be heading for, we think, -0.50% and once we have the announcements of a fresh QE programme (as we surely will), then that yield will very likely drop further.

Those eye-watering negative yield levels – and past performance – are only going to push more money into corporate bonds and asset allocators will be increasing exposure to the corporate bond market. Therefore squeeze in secondary looks unstoppable now even as primary continues to attract massive demand and most of the attention.

We are already at record low corporate bond yields (0.77%, iBoxx index) but have a considerable way to go before spreads reach the record lows. However, with QE (most likely) to come, the spread markets ought to be heading for record territory as well it seems (iBoxx index needs to tighten 40bp).

With the music unlikely going to stop just yet, it that suggests there is much juice left still in the corporate bond market. This month has been fantastic already. Whilst the AT1 is the star of the show, everything is being dragged better. IG spreads are 47bp/19bp tighter this year and month, respectively.

There has been much caution around the high yield market this year, but that has now been swept aside. Spreads are 52bp tighter this month, some 109bp this year and returns year to date have ratcheted higher to 7.3%. Overall, for credit, the performance numbers come month-end are going to look fantastic. In addition, with the ECB posted, we believe that more cash will come into the market chasing spreads tighter.


Primary still poised

With funding costs falling and likely crunching lower over the next few months, corporate treasury desks will be looking very closely at the market with an eye on getting in even more cash on balance sheet at these historically low costs.

IG non-financial issuance for the month sits at a touch over €27bn and we need just €8bn this week to get is over the line in order for this June being the best since 2014 (see table, below). Last week’s central bank meetings/holiday-interrupted week came up with €7.8bn from 14 individual tranches. For the year to date we are at €154bn and on course, as mentioned in previous notes, for somewhere in excess of €250bn for the full year.

Elsewhere, the high yield market’s year to date issuance is at €29bn and for the senior financials market, a better than expected €92bn. The pipeline for the former looks particularly heavy and we are looking for a decent amount of activity over the next 3 weeks perhaps, before the market overall winds down for the summer break (after mid-July as a rule of thumb).


Clear week ahead

After all the tension around the FOMC, we closed out the week in subdued fashion with the markets doing very little on Thursday and Friday. Equities closed in the red across the board but the declines were less than 0.2% reflecting a level of apathy across markets. The S&P closed just shy of Thursday’s record high.

Bitcoin has enjoyed a rather good 6 months

In rates, we had a bit of a back-up, which saw the 10-year benchmarks at -0.285% (+3bp, Bunds), 2.06% (+6bp, US Treasury) and 085% (+5bp, Gilts). Gold sits above $1400 an ounce and Bitcoin smashed through $11k a coin on Saturday.

The Markit iBoxx IG cash index tightened another 2bp in the session, to B+125bp and is now just 3bp wider than the tights we saw in April. May was a difficult month for the markets. We would think that we will recover the 3bp during this week and reverse therefore all of May’s widening.

We had a bit of weakness in the AT1 market, with it being a touch better offered for choice although that didn’t filter through into the high yield market. The dual-tranche Gimv NV deal (€250m) was priced and secondary was 1.5bp tighter, leaving the HY iBoxx index at B+417.8bp – the best level since early May.

The sterling market has shown some decent resilience and didn’t weaken in May a much as the euro-denominated corporate market. The recovery has been a touch more laboured, but the market is grinding tighter as well an at G+157bp (-1bp) it is 5bp away from the tights seen a few weeks ago. Total returns for the sterling iBoxx corporate bond index come in at 7.5%.

There is somewhat a clear week ahead with eyes on the G20 summit which doesn’t begin until Friday. The obvious focus there will be Trump, Xi and tariffs.

Have a good day.

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.