3rd January 2018

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iTraxx Main

44.2bp, -1bp

iTraxx X-Over

228.7bp, -5bp

10 Yr Bund

0.44%, -3bp

iBoxx Corp IG

B+94.6bp, -0.7bp

iBoxx Corp HY

B+282.4bp, -4.5bp

10 Yr US T-Bond

2.44%, -2bp

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″]

Markets re-open proper for business

There was more activity in the markets on Wednesday, with a couple of the easier corporate deals to get away, and also a smattering of covered bond issues (also easier deals to get away). BMW is frequently an early issuer in the capital markets and it didn’t disappoint again as it opened the corporate bond market’s IG borrower activity alongside Renault – through its RCI Banque subsidiary.

Overall, the markets were in good shape, no doubt buoyed by the opening day activity in the US and the higher closes (S&P and Nasdaq records) and so European equities recovered their previous losses and we even had a better bid for duration. These early skirmishes are all about market participants finding their feet after a month of little activity.

And because the markets are all interconnected, it does matter what happens in equities. They’re usually the first port of call on global macro, geopolitics and event risk – or otherwise, which might emerge from them. From higher stock markets, we see confidence filter into other risk asset pricing (lower markets saps away at pricing).

At the moment the going on this front is good and it does seem like we are in the mood to swat away problems in Iran (at the moment), seen as ‘just’ another global geopolitical tension point not enough in itself to generate something more sinister. Apart from, that is, higher oil prices (and likely boost inflation for a short period), but also boost the US shale producers. Rate markets will also react like they did on Wednesday and likely be supported by a better bid as some think of adding some safe-haven positioning – just in case.

There’s little there, though, to derail the interest in the corporate bond market, as it stands. We’re a safe-haven asset class and a beneficiary of higher equity markets/confidence/yield pick-up versus government bonds. Better macro adds confidence into the corporate bond sector as it underpins credit quality (and boosts it).

All we really need to keep our eye on is how flows are developing and how asset allocators might alter their view on the relative value of corporate risk versus equities.

Primary back to normal

BMW opened the year in IG to the tune of €2bn

Often busy in the markets in January, and not averse to opening the market in any given year, BMW was in for €2bn in two tranches to get us up and running. The deals came courtesy of a 5.5-year €1.25bn print at midswaps+12bp and €750m at midswaps+25bp. They were priced 13bp and 15bp respectively, inside the opening guidance.

RCI Banque issued €750m in the form of a 5-year floater and was priced 17bp inside the opening talk at Euribor+43bp (books at €2.3bn).

So, a good day’s business delivering €2.75bn for a year in which we look for somewhere around €270bn of issuance from IG non-financial corporates. The rest was essentially a glut of covered bond deals in various currencies, and notably a sovereign deal from Ireland which lifted €4bn at midswaps+2bp off a €14bn book in a long 10-year maturity.

Recovering opening losses, credit spreads tighter

US President Trump’s latest bizarre outburst

Weakness in European stocks and rate markets were both reversed in the session. US stocks opened positively and went higher into record territory buoyed by tax reforms and unfazed by the latest spat between Trump and Kim Jong Un, while choosing also not to be too concerned ahead of the latest Fed minutes.

European stocks rose smartly throughout the session and wiped out all the new year’s opening day losses.

In rate markets, we had a similar sharp reversal from the previous day’s losses. 10-year Gilt yields declined 1.21% (-7.5bp) and pretty much back to year-end levels. Bunds yields fell by 3bp to 0.44% in the same maturity while the US Treasury edged to 2.44% (-2bp).

Credit, as seen through the eyes of the iTraxx indices, was in bullish mood. Synthetic iTraxx Main closed a basis point lower at 44.2bp and X-Over dropped 5bp to 228.7bp. As a reminder we are targeting S28 year-end targets of 35bp and 180bp, respectively, for Main and X-Over.

In the cash market, it was not a particularly busy secondary sector with some focus for investors on the new deal flow. Still, the positive tone for risk assets generally fed through into credit and meant that prices were marked up a little. The iBoxx index closed t B+94.6bp – 0.6bp lower and now just 0.5bp higher than the lowest level recorded of 94.1bp back in March 2015. A new record looks like being this week’s business!

And we think it could be the same story for the CoCo index, where the spread dropped to B+359bp and just 8bp off the record low seen on this index. That represents a solid recovery after the sector recoiled following that November record tight. It seems higher-yielding assets are still in vogue and the banking sector’s recovery is helping to reinforce confidence in the CoCo product.

We did see high yield corporate markets better too, but not with the same gusto as the CoCo market, with spreads at the close only 4.5bp tighter in the high yield index at B+282.4bp (-4.5bp).

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.