22nd March 2018

Markets befuddled

iTraxx Main

59.8bp, +1.5bp

iTraxx X-Over

289.3bp, +4.7bp

10 Yr Bund

0.53%, -6bp

iBoxx Corp IG

B+105.3bp, +1.8bp

iBoxx Corp HY

B+329bp, +9bp

10 Yr US T-Bond

2.83%, -7bp

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″]

In need of some TLC…

Credit is failing to shake off the cobwebs of an uncertain start to the year in all areas of the corporate bond market. There’s lethargy about the primary and secondary markets while credit spreads are now in ‘drift’ mode. The market was temporarily awoken from its slumber last week after the Sanofi and Richemont deal flow, but that has proved to be a fleeting moment. Both of those borrowers can be pleased with their day’s work in terms of the size and interest for the multi-tranche offerings because the rest of the corporate bond market is feeling unloved at the moment. We can take more supply, but there seems to be a bit of a pushback from borrowers (in no rush?) content to wait and sit out this period of uncertainty.

And who have thought that after a 25bp rate hike by the Fed with just three (as largely expected) pencilled in for the year as a whole, we would have enough reason for US Treasuries to rally? But that other rate markets rallied too, although probably for different reasons. Eurozone rates caught a bid and some of that we can ascribe to the Treasury rally, but largely – and more likely – because we had yet another data point suggesting that the growth dynamic in the region peaked in December/January. And that we are set for a lower rate of growth from here.

The latest composite PMI for the Eurozone dropped to 55.3 from 57.1 in February with some of that put down to the bad weather, but the euro strength is hitting exports while trade protectionism fears might be impacting investment. That was backed up by the Ifo German business gauge which slipped to 114.7 February from 117.6 in January, sullying the mood for the session.

Whatever, the drip feed of news which isn’t conducive to a brighter outlook is now taking its toll. Draghi and the ECB will have taken note. The markets certainly have, trading through yet another weak session in Europe. The UK was a bright spot, with retail sales for February up 0.8% month on month versus a 0.4% forecast. So just as the monetary policy committee (MPC) was meeting, sterling moved smartly higher and that impacted the FTSE which was left comfortably in the red.

…and not just in credit

Zuckerberg: Defriended

So the UK MPC met and voted 7-2 to keep rates unchanged. Facebook came under more pressure as comments from the German justice minister made sure the scandal around the potential ‘misuse of data’ has legs in it. The company’s now friendless chief executive Zuckerberg’s comments overnight did little to appease anyone.

Then there was apprehension throughout the day around the release of the US administrations plans to fight ‘Chinese economic aggression’. The announcement finally came – the administration intends to hit Chinese imports with $50bn of ‘reciprocal’ tariffs – with more to come (according to the President). On steel imports, the EU seemingly got its tariff exemption.

As for the FOMC, it seems the market was expecting greater hawkish overtones, which in the event didn’t materialise. The Fed, after all, is grappling with a very unpredictable President and probably played it well by maintaining the status quo and keeping it safe. And just when we were absorbing all of that, the lawyer representing Trump in the Mueller probe resigns!

Stocks took a serious hit, though, recording losses of 1 – 2% across most markets although we closed off the day’s worst levels in Europe. US stocks staged a recovery in the immediate aftermath of the Chinese tariff announcement – but then took another material leg lower with the Dow off around 3%.

The Dax – as is usual these days – took the worst of it this side of the pond (and was -2.3% at one stage before closing 1.7% lower) and is off by almost 7% for this year! For fixed income, the safe haven bid will help to assuage the worst of fears on credit for total return portfolios, as the stronger bid for the underlying acts as a counter to weakness in corporate bond spreads. Small mercies.

And as at the European close, that bid for safe havens allowed the US Treasury yield to drop to 2.83% (-7bp) for the 10-year, the equivalent Bund yield fell to 0.53% (-6bp, and we had seen 0.81% a few weeks ago), while the 10-year Gilt yield was 10bp lower at 1.43%.

High yield borrowers dominate primary

Canadian based insurance group Fairfax Financial was the sole IG borrower in the session, with a €600m 10-year deal priced at midswaps+190bp, which was 10bp inside the initial price talk off a book at around €1bn. Also in financials but high yield rated, AIB Group came with a senior 5-year deal priced at midswaps+115bp, for €500m.

The high yield market piped up with a trio of borrowers. LKQ European Holdings issued €750m in an 8NC3 deal priced to yield 3.625% (in the middle of the initial range) as well as a €250m 10NC5 offering priced at a 4.125% yield and also in the middle of the opening guidance range. Next up was Globalworth Real Estate’s €550m 7-year transaction priced to yield 3.125% – and 25bp inside the opening guidance off a book in excess of €1bn. Finally, Teamsystem issued €550m in a 5NC1 senior secured floater priced at Euribor+400bp. Tui AG pulled its anticipated 7-year deal.

So, in high yield, we had €2.1bn issued in the day, which took the monthly supply to a very respectable €10.3bn – and €18.7bn for the year to date, which is a run rate well ahead of our expectations.

High Yield Issuance on FirewpDataTable with provided ID not found!

Remember, we are looking for only €55-60bn of issuance for this year as a whole. Much will depend on how the summer months play out, as it as this time that issuance can fall away dramatically. But for now, we could be looking at yet another very good year of issuance from the high yield corporate debt market, just as secondary has little interest (and spreads are widening).

The iTraxx indices were better bid (higher) as we might expect given that weakness inquiries and better bid for government bonds. iTraxx Main closed at 59.8bp (+1.5bp) and X-Over rose by 4.7bp to 289.3bp.

Of course, the cash market was weaker too, even if the supply was limited to the high yield market predominately. The lack of IG issuance and the ECB’s QE is probably helping to contain any material weakness in IG spreads. Still, we did go wider, leaving the Markit iBoxx IG cash index at B+105.3bp (+1.8bp) representing a moderate move wider given the plethora of potentially negative/difficult news flow. The CoCo index was 12bp wider up at B+382bp, some 20bp wider YTD now and 100bp off the tights seen two months ago!

As for the high yield market, we were clearly always going to be under some pressure. While most were focused on the primary market issues, there was weakness in secondary and the iBoxx cash index was left at B+329bp (+9bp) – and 44bp wider YTD. We are in for a difficult day on Friday following those big falls in the US.

Finally, due to a long-standing prior commitment, we will be unable to publish a note on Monday. We will be back on Tuesday next week.

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.