27th May 2019

Looking to erupt

MARKET CLOSE:
iTraxx Main

68.2bp

iTraxx X-Over

293.8bp

🇩🇪 10 Yr Bund

-0.14%, -2bp

iBoxx Corp IG

B+140.7bp, unchanged

iBoxx Corp HY

B+443.6bp, -2bp

🇺🇸 10 Yr US T-Bond

2.32%

🇬🇧 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″]

Close your eyes…

After last week’s Rallye/Casino flare-up, does anyone in credit care much about idiosyncratic risk at the moment? Or even the potential for systemic event risk, for that matter? It’s tempting to think that it is just a case of closing one’s eyes and buy. We are all too well aware in the method of the madness, in that the reasons supporting investment in the corporate bond market are clear. And so, since 2009, when the so-called fixed income bull market started, borne out of the financial crisis, every pull-back has actually been a buying opportunity.

One supposes that it will all end in tears, but when it does – if it does- all markets will be affected. We think that this is no time to bail, though. Credit fundamentals are on a fairly solid footing at the moment, and the give-up in spreads of late ought not to concern us too much given we had bagged so much performance this year already.

A word on the triggers. We don’t believe that a systemic crisis will be one of them. Central banks have been ultra-vigilant for the past decade and remain so. We might also not be able to rely on a Fed put anymore for ‘idiosyncratic events’, but if a systemic crisis erupted they would feel compelled to react. As for single name event risk, it is always with us, but it won’t disrupt the border market.

That leaves us looking at which events might instead cause market and macro disruptions. Trump winning a second term, trade wars, the economic and political difficulties in Italy and now, of course, the reality of a no-deal Brexit. These are all events which will disrupt and policy response into the sustained medium/perhaps long-term macro weakness will be to stay accommodative. That is, the fixed income bull run actually continues.

As measured by the iBoxx index, IG spreads have tightened by 33bp this year. They were over 50bp tighter at the end of April, before the 19bp weakness seen this month. The high yield market has been in the wars of late, affected by single name event risk amid volatility and weakness in equities. Spreads in the index, though, are still 80bp tighter year to date, while May’s weakness has seen 45bp of a pull-back.


A couple of good primary days could make a merry May

Primary activity kind of fizzled out into the end of last week. We still managed €10bn+ of IG non-financial deals, though, so few will begrudge a quieter Friday allowing us to digest the transactions. Of course, with Theresa May quitting, many were focused elsewhere.

Still, we managed to get three borrowers come with triple tranche euro-denominated deals, of which there were 13 other borrowers before them (some with more tranches). They include the likes of Orange, IBM ( 4 tranches), VW Bank (4), Altria (4), Siemens, Fortum, Daimler, Coca-Col and Medtronic (5).

The total deal number in IG non-financials now rises to €125.7bn with May’s total up at a sprightly €28.5bn and with a week to go we are heading for quite possibly the best month for issuance this year. The target is €30.7bn which came in May. €6.5bn of issuance would leave May as the best month since March 2017. It’s not out of the question.

The respective numbers for high yield and senior issuance for May come in at €5.2bn and €11.7bn, with last week recording some busy sessions in the senior financial space. That high yield total now comes in at €25bn for the year so far, and €50bn is a reasonable target for the full year.


Auto-consolidation and elections. Now, back to the trade war

If one missed it – which is unlikely – the corporate news of the long weekend was the proposed tie-up between Fiat Chrysler and Renault. Consolidation in the troubled, rather challenged, auto industry is expected to pick up as the shift away from fossil fuels to electric and other cleaner sources of energy to power vehicles heaps much pressure on the various protagonists.

This all-share deal would see Fiat Chrysler and Renault each own 50% of the new group creating a Fiat Chrysler Renault (FCR?) group which would be the third largest player in the world and would leave any deal between Renault and Nissan or the new group and Nissan sidelined for the moment.

The “transformative… friendly proposal” saw Renault stock rise by almost 15% and it will be viewed as a credit positive event, which will be reflected in cash and CDS prices the markets open on Tuesday.

Alas, we turn to European and UK politics/elections. They’re vying for the top headlines and while the weekend was dominated by who may or may not stand for election as the next Conservative Party leader in the UK with all the possible Brexit-related implications that holds, Monday was all about the European elections.

The Brexit Party was the clear winner in the UK, the Liberal Democrats and a whole host of smaller/independent parties benefited from remain-protest voters while the Tories and Labour were punished for failing to nail a deal in the case of the former and failing to back a second referendum for the latter. The UK will move on now and focus for the next few on the Tory leadership battle.

Over in China, industrial profits at the country’s largest groups fell the most in almost 4-years (-3.7% year on year in April) and at the end of the week we have Chinese PMIs for May which will be closely watched.

Otherwise, Monday was a fairly quiet session with London/US markets closed. European equites, generally, were in the black, while the US markets were shut for Memorial Day. Bitcoin, though, has had a very decent couple of days, and is now up at $8,800 per coin as it looks at $10k a coin as the next stop.

Rates saw a better bid and pushed the 10-year Bund yield to a 2-year low of -0.14%, likely after news emerged that Austrian Chancellor Sebastian Kurz was ousted following a no-confidence vote on the back of the ‘Ibiza’ corruption scandal. In addition, the loss of the Centre’s majority in the EU parliament might also have been a contributing factor.

The record low yield on this benchmark is -0.20% and we’re slowly edging there as a confluence of factors macro and geopolitical make their impact.

In credit, the market closed unchanged in IG in last week’s final session with the cash iBoxx index at B+140.7bp, while the HY index was 2bp tighter at B+443.6bp and reflecting really the positive slant in equities through a quiet period into the elections period. iTraxx main closed last week at 68.2bp and X-Over at 293.8bp.  Nothing happened in Monday’s session.

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.