13th May 2018

Markets boing boing

iTraxx Main

54.4bp, -0.7bp

iTraxx X-Over

268bp, unchanged

🇩🇪 10 Yr Bund

0.56%, +1bp

iBoxx Corp IG

B+106bp, -0.8bp

iBoxx Corp HY

B+326.7bp, -3bp

🇺🇸 10 Yr US T-Bond

2.97%, unchanged

🇬🇧 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=”15″], [wp_live_scraper id=”16″]

Who sold in May?…

So far so good for May. There is a decent bid behind both equities and rates product as investors in them choose to play to different themes. Be it macro, geopolitics or policy intervention, there is reason enough for both of these markets to gain while credit looks stuck still pondering the next big move. It was the most underwhelming of weeks for the credit market. Nevertheless, there is an improved tone around equities and that usually means most risk assets will be lifted higher, too. Rate markets have propelled US yields into a new orbit, but were not quite getting there in Europe. Credit is in a holding pattern.

The US has 10-year Treasuries in a 2.95 – 3.03% yield zone, with the markets unsure how rising rates (2 or 3 more hikes) might impact the long end of the curve which remains extremely flat and is telling us that there is massive uncertainty as to the medium term US growth dynamic and whether inflation can shoot higher. The yield on Eurozone government bonds – where the benchmark 10-year Bund is failing to hold above 0.60% for any sustainable period suggests that the recent data is pointing to a loss in momentum in growth amid continued subdued inflation.

Equities are sitting comfortably with the current situation. Rate uncertainty maintains the attractiveness of equities in the US. Low market yields in Europe keep funding costs low, and while the economy might not be breaking higher the current level of growth keeps European equities propped up. Any euro/sterling weakness versus the dollar also adds some lure to European equities.

Credit? Just sits there. The uncertainty on macro and geopolitics isn’t really affecting the corporate bond markets. Actually, the market is doing very little, almost as if it has run out of steam! Spreads are going nowhere and IG non-financial supply levels are running 30% below the average run rate of the last five years. At least the high yield primary market is in good form (on a record run), while the financial sector has been issuing enough to maintain supply at post-crisis average levels.

And all that is occurring just when the conditions and environment ought to see the European corporate credit market in the ascendancy. A Goldilocks economic-like outlook, European government bond market better bid and yields still at lows levels, inflation not breaking a sweat, a default rate close to zero and primary in the doldrums. Lest we forget the ECB lifting circa €3bn per month still of IG non-financial debt and significant levels of investors’ sidelined cash is still looking to get invested. What more do we need?

Aye yai yai yai yai!

Well, that’s what we must be thinking about corporate primary. Another week went by and the much-hoped-for pick up in IG issuance failed to materialise. As we have stated many times over these past few weeks, it wouldn’t be so frustrating if at least spreads were tightening to offset the lack of supply. We’re getting neither.

For IG non-financials, there is some excitement around the potential for a pick-up in reverse Yankee deals given the high and rising interest rate differential between the two markets. United Technologies and Paccar are thought to be lined up as the first US borrowers resuming borrowing in euros. The deals would be most welcome, anything would at this stage of proceedings. But they do not hide – or make up for – the lack of deal flow we’ve had this year.

We are now halfway through May and the non-financial IG total stands at under €5bn for this month. It’s a shocker. For the year so far it’s just €74.4bn versus the January – May period last year up at €129bn. We’re down by around 43% year-on-year although we have a couple of weeks to go before month-end to correct this year’s total higher.

IG Issuance Slowdown

The high yield market, as suggested earlier, has been going great guns and issuance is running at a record run rate. This month’s total for the opening couple of weeks comes to €3.35bn and the year-to-date total is €33.8bn leaving us looking for €6bn and 37bn, respectively, come month end. We’re well on the way to exceeding 2017’s record total of €75bn.

Can the good times roll?

First and foremost, the North Korean dismantling of its nuclear site(s) has to be seen as good news. There should be reason enough why we should be looking at the June 12 summit expecting the best. Unfortunately, the tearing up of the Iran deal by the US administration adds a different geopolitical event into the mixer. For now, the broader markets have been ignoring the potential ramifications of it. Oil, though, is heading higher and the inflation/confidence/consumer spending follow-on impact is going to felt through the second half of this year.

The markets have also been a little blasé (we believe) on the Italian risks. It could be that the worst of their individual policies (Five Star/League if they form a government) might be avoided once the realities of high office are felt. BTPs might have seen yields rise by 20bp in the last week or so, but the closing couple of sessions of last week saw them unmoved (at 1.88%, 10-year).

Elsewhere, rates closed unchanged at the end of last week, the 10-year US Treasury yielding 2.97%, the Bund 0.56% and the equivalent maturity Gilt 1.45 (+2bp). Equities across the board were broadly flat or small up/down, but importantly they managed to hold in the black year-to-date, for the S&P/Dow and the Dax.

Cash credit was a little better, but that was just in line with the prevailing improved tone. The Markit iBoxx cash IG index closed at B+106bp (-0.8bp) and the high yield index at 326.7bp (-3bp). They were both a smidgeon tighter for the week. As for index, we had iTraxx Main at 54.4bp (-0.7bp) at the close and X-Over 3bp lower at 326.7bp.

For this week, we close out the earnings season with the US retailers towards the end of the week. The data will be centred on retail sales on a generally lighter week on the data front. A big focus will be on the trade talks between the Chinese and US taking place Washington.

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.