22nd February 2017

Look at that, it’s something else

FTSE 100
7,274, -26
11,967, +140
S&P 500
2,365, +14
iTraxx Main
73.5bp, -0.5bp
iTraxx X-Over Index
296bp, -2bp
10 Yr Bund
0.30%, unchanged
iBoxx Corp IG
B+136bp, +0.4bp 
iBoxx Corp HY Index
B+373bp, -2bp
10 Yr US T-Bond
2.43%, +1bp

Correlations breakdown…

So, bond market yields are yet to go through the roof. In fact, 2-year German yields are at around record lows (-0.84%) with the 10-year clinging on to a low-30bp yield level. And that is after we have a blooming Eurozone economy in the making.

That was further highlighted yesterday by a raft of data around PMIs being at their highest level for six years, and a Markit report suggesting upbeat private sector activity in February in France and Germany. In the US, manufacturing and service sector PMIs came in weaker than expected in February.

Nevertheless, equities in the US are trading on multi-year highs on forward P/Es of over 17, but have some way to go before they get to the late ’90s pre-market crash levels. Still, they’re telling us an earnings recovery is on its way – or, in the words of Greenspan, markets are beset by a heavy dose of “irrational exuberance.”

While US equities have been roaring, the Treasury sell-off or not suggests some circumspection. Policy rates are going higher and at the moment it seems like we’re going to flatten and not steepen. In Europe, the heavy hand of the ECB’s quantitative easing manipulation is likely keeping the front-end anchored (they can now buy debt at rates below the deposit rate), but the longer end is failing to wag by much.

Political fear is also at play, sustaining a choppy but eventually decent bid for Bunds while OATs came under some pressure (following latest polls showing Le Pen extending her lead). That 10-year spread once again edged higher (to 80bp and off a session high of 83bp).

Juncker reports add to uncertainty

Leaving so soon? Jean-Claude Juncker’s bosses deny rumours

Certainty and stability are required into Brexit/Article 50 and the forthcoming French election, so reports that Juncker might be close to throwing in the towel will not help. Credit doesn’t seem too fussed with spreads barely moving and primary delivering a few more deals.

However, there is much leakage somewhere because €2bn+ of ECB corporate bond QE per week in 2017 has not helped spreads tighten. It is not as if we have been inundated with a huge amount of IG issuance, either.

In all, the different asset classes and the breakdown in classic correlations within them – and between them – is something new for which we have to contend with. It is bit of a minefield through which we need to manoeuvre (geopolitics, Trump, economic sustainability) and at times like this, it’s always best to sit tight and/or follow the herd.

In credit, primary is where the herd resides and feels comfortable, even if value is eroding as each deal passes. In secondary though, any spread weakness and emerging liquidity might be an opportunity, as fundamentals are improving and ultimately will prove to be a net supportive factor for the market.

Primary still chugging along

There were deals as €2.4bn of non-financial IG issuance visited. Daimler took €1.25bn in 8-year funding at midswaps+32bp and some 13bp inside the initial guidance (book was 2x subscribed). Parker-Hannifin also did an 8-year but for €700m at midswaps+65bp and a whopping 25bp inside the opening talk.

2i Rete Gas: €435m, 9-year deal

Italy’s 2i Rete Gas issued €435m in a long 9-year transaction (included a buy-back, too) at midswaps+112bp, managing to reduce the pricing by 18bp on a 4x oversubscribed book.

The tally for IG non-financial issuance pushed higher, to €3,385m for the week and €12,885m for the month so far. It’s not enough issuance, given the size of demand for deals – but nor is the low levels of supply having any appreciable impact on secondary market activity or spreads.

After a perkier session on Monday, financials were quiet with just a small tap from DVB Bank.

Risk asset valuations selectively on the up

Equities led the charge, on the front foot from the start and boosted by the US which opened well into the black. Wal-Mart and Home Depot helped that afternoon push as they reported earnings ahead of expectations. The DAX index closed adding another 140 points to the index, and is now just 33 points shy of the 12,000 mark – up some 4.2% year-to-date.

The 10-year Bund yield ended unchanged at 0.30%, the equivalent maturity OAT at 1.10% while Gilt yields rose to 1.24% (+2bp). All choppy in a narrow range.

In secondary credit, we managed to edge wider, by just under 0.5bp (as measured by the Markit iBoxx IG corporate bond cash index) in a fairly unremarkable session. The sterling cash index moved the other way, tighter by 0.4bp, to G+151.7bp.

As for high yield, primary drew a customary blank, but spreads did move 2bp tighter and returns passed 1.5% YTD making the best performing of the credit asset classes thus far in 2017.

Finally, the indices spent the session playing out in a narrow range, eventually seeing Main at 73.5bp (-0.5bp) and X-Over at 296bp (-2bp).

Back tomorrow.

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.