- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Few are going to chase the market at the moment. In that sense, the lateness of Easter this year will probably be much welcomed. The air strikes on Syria might have some more to play out, and the markets will take a reserved and more cautious stance while we get some visibility as to how things play out in the Middle East. It’s not business as usual.
We’re also just a couple of weeks away from the first round of the French elections, so there is reason aplenty to play it from the safe side. For credit, that’s relatively easy, because it means carry on as we were and focus predominately on the primary market. For secondary, spreads might tighten/widen a little on the geopolitical news flow, but investors will also be keeping a keen eye on how the ECB’s grab-fest of IG non-financial corporate bond evolves now that they’re reducing overall monthly QE-related purchases from €80bn to €60bn.
We really won’t get much colour on how secondary market corporate bond valuations might be impacted by the potential for a reduced accumulation of corporate bonds from the ECB for a while, while positive macro ought to offer an offset to any spread weakness as fundamentals improve (to counter those less supportive technicals). For now, IG spreads (as measured by the Markit iBoxx index) are stuck at 130bp, having tightened by just 4bp this year. The index was a touch higher as we closed last week, but spreads are moving in very narrow ranges as all focus is on primary.
There might be an air of uncertainty and apprehension around, but the high yield market is showing some good resilience to any tensions. Spreads here are also barely moved – just 2bp of weakness was recorded last week, the index at B+378bp (-35bp YTD).
On the primary market front, IG non-financial issuance only offered €3.8bn of deals last week. We had hoped for more than double that in this shortened week – but that might need to be reassessed given the Syrian situation. HY issuance for the month so far stands at €600m from just two issues and we also hoped that would be bettered by more than 2x this week – that is unlikely now.
There will probably be a better bid for safe-haven risk in the near term, so government bond yields ought to hold on to current levels (or go a little lower), and equities are unlikely to lurch in any direction while the escalated nature of the geopolitical uncertainties persists.
In credit, we would think that secondary (as ever) remains light, while primary might largely be sidelined (as already suggested). There’s no need to reduce risk positions though, or get more defensive – not in credit anyway. Poor liquidity and still massively positive technicals (sidelined cash, reduced supply, ECB buying) will continue to offer considerable support to this market.
Geopolitics dictate, but it’s also earnings season
Surprisingly, the credit market’s risk proxies were unmoved on Friday, with iTraxx Main at 74.3bp and X-Over at 283.6bp (-1bp). The indices now have the medium-term potential to out/underperform the cash market depending on how events in the Middle East play out, coupled with macro developments. For the latter, that surprisingly weak non-farm payroll report gives much to think about, although we will likely need to see another print or two before we can – or should – draw any firm conclusions as to the durability of any US economic recovery. In that sense, we have the latest inflation and retail sales reports due this week.
There seems to be a decoupling between European and US bond yields, the Bund in the 10-year maturity edging lower to 0.23% and outside the Q1 established range of 0.30 – 0.50%, while the equivalent Treasury stays in its range at 2.38% (range being 2.30 – 2.60%).
The situation in the Middle East will dominate the news, and obviously dictate where those yields head in the near-term. But we do also have the earnings season to look forward to. The main focus here will be the US banks where several are due to report (Wells, Citi and JP Morgan) towards the end of the week.
Have a good day.
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