18th October 2017

The mad world

iTraxx Main

54.9bp, unchanged

iTraxx X-Over

242.2p, +1.1bp

10 Yr Bund

0.40%, +4bp

iBoxx Corp IG

B+103.4bp, -0.9bp

iBoxx Corp HY

B+266.8bp, -5bp

10 Yr US T-Bond

2.34%, +4bp

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″]

…That is the high yield market

We’ve broken the link between the level of supply and the direction of spreads. We are heading for a record level of issuance in the high yield market, yet we have still seen a fairly aggressive tightening in secondary spreads for junk rated debt. On the other hand, in the investment grade market, the lower-than-expected levels of issuance have seen spreads only grind out a moderate tightening dynamic.

Classically, we should expect the opposite trajectory for the high yield spread markets (or at least a more moderate tightening) given the very high levels of issuance; and a more aggressive tightening trend for the investment grade market.

The investment flows though are clearly skewed – or rather manipulated through the ECB’s QE – towards higher yielding risk as rate markets yields/returns remain at depressed levels. So while demand is at high levels for both products which are still enjoying considerable inflows into funds – especially in IG, investors in IG markets are content to sit and wait for primary (at the moment) while high yield secondary is closely correlated with rising stock markets (and those low yields elsewhere).

So credit market investors and issuers alike continue to enjoy their moment. In a sense, the financial crisis has actually been kind to them. Including 2008, total returns for IG corporate bonds have been positive every year except two (2008 and 2015). For high yield portfolios, negative returns were seen in 2008, followed by the option-like return of +74% in 2009 and zero in 2015 – otherwise they have been positive every year.

Unless we get a catastrophe in rate markets into year-end (a major sell-off, that is), then it looks like we are going to have a most respectable of years for the corporate bond markets, for both benchmark and total return investors.

Already this month, the high yield cash index is 10bp tighter having gained a renewed vigour following a more tepid period through the summer period. For the year as a whole, the index has tightened 146bp, from B+413bp to a  record low level of B+267bp. And that comes even after the record run rate in the level of issuance. In fact, the recently approved merger creating the Wind Tre Italian telecoms group is due to take in the equivalent of €7.3bn in funding (dollars, euros, plus loans) – and will take us over the line in making 2017 a record year for funding in the capital markets for corporates ranked in the high yield debt category.

We are thinking in terms of spreads moving even tighter from here into year-end and while we previously suggested B+250bp might be a reasonable target (on the index), if deals get well-received they usually boost confidence in the asset class and that means even tighter spreads (so a sub-250bp index level is quite possible which will take returns to over 7% for the full-year!). Few are selling risk to ‘make room’ for new issues. There’s too much cash around the system for that to be the case.

Ooh aah, just a little bit more

€950m in 2 deals from Europcar

We had a little more in primary, and where the high yield markets keep our interest. There were a couple of Europcar structures with Europcar Drive DAC issuing €600m in a 7NC3 deal priced to yield 4.125% and Europcar (FleetCo) taking €350m in a 5NC2 structure priced to yield 2.625%. That was €950m in the session, €5.36bn for the month and all closing in on that record €57bn of 2014 (now up at €53.6bn).

For IG, we had an inaugural dual tranche offering from the triple-B rated Italian supermarkets group Esselunga which took a combined €1bn in 6-year and 10-year maturities, at midswaps+65bp and +110bp, respectively. They were both priced 25bp tighter than the initial pricing salvo. The deals took the monthly total to €9bn and the annual level to €219bn. Both levels are unremarkable. The other IG deal came from Norwegian state-owned power grid operator Statnett SF for €500m.

After nothing for a week, we had Morgan Stanley populate the senior financial space as a dual-tranche grab took €2.75bn of funding, leaving the month to date total up at €8.05bn. And finally, Credit Mutuel Arkea printed €500m in a 12NC7 Tier 2 deal, at midswaps+145bp (-20bp versus the initial price talk).

And finally…

We had a classic session where equities pushed higher, rate markets sold of a little and credit spreads moved tighter. It’s been a long time coming. We moved out of those +/-0.2% like ranges for stocks in Europe as most indices were firmly in the black for the day. Suffice it to say, we were looking again at record closes in the US amid comments from the Treasury Secretary that tax reforms were key in boosting US risk assets.

Rate markets saw yields back up. After a good rally in Tuesday’s session for Gilts, they were in reverse on Wednesday as the yield rose 3bp to 1.31bp (10-year). US Treasuries yields backed up to 2.34% (+4bp) and the 10-year Bund was yielding 0.40% (+4bp) while even the 10-year Bono saw 1.63% at the close (+8bp).

The iTraxx synthetic indices didn’t reflect the better risk on tone, with Main left unchanged at the close at 54.9bp and X-Over edged up 1.1bp to 242.2bp.

In the cash market, spreads were tighter in IG with the iBoxx cash index 0.9bp lower at B+103.4bp and now just 1.5bp off the lows for 2017 – and now just 10bp from the index record low. The CoCo index tightened too even if there wasn’t much turnover and it is now marked at B+417bp (-5bp, 16bp off the record low) while the index yield saw a new record low of 3.83%.

In the high yield market, a squeeze. Spreads crunched tighter and the cash Markit iBoxx index dropped to B+266.8bp (-5bp) – a clear, new record low. The index yield also dropped to a new low, of just 2.48%. And all that as we close in on a record year for issuance.

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.