19th November 2017

Mixed signals

iTraxx Main

51.5bp, -0.6bp

iTraxx X-Over

244.9bp, +0.5bp

10 Yr Bund

0.36%, -1bp

iBoxx Corp IG

B+100.8bp, -1.3bp

iBoxx Corp HY

B+287.5bp, +0.5bp

10 Yr US T-Bond

2.34%, -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″]

Relax, don’t do it…

We’ve been through the grinder a bit in these opening couple of weeks of the month, but have managed to stabilise and regain some of the lost performance. The flow in the secondary cash market has not justified in any way the level of weakness that we have had and we believe that a more stable or rising stock market will see cash spreads rediscover a clearer tightening trend, and on a more consistent footing.

Through periods of weakness like we have just endured, secondary market liquidity is a massive factor leading to some exaggerated moves – and we have seen just that. Mind, we have had to contend with well over €20bn of IG non-financial issuance in just two weeks and so the eye might have been off the ball in some sense. Some of the more recent deals might not have got off to the good start on the break as we had been used to, but we’re seeing some good recovery now.

The nervous many will be relieved that we pulled back from some kind of ‘brink’. It was never that, and to suggest otherwise is a complete exaggeration. That weakness from the beginning of the month into the middle of last week in corporate bond spreads came after a 3-month tightening which took several market sectors into record spread territory. Cash clearly underperformed index (synthetics), but cash always lags in terms of its directional movement due to its relatively worse liquidity. iTraxx Main, for instance, closed the week at 51.5bp which was 0.5bp tighter in the week, while X-Over at 244.9bp was just 0.6bp wider – and they were around 4bp and 12bp off the wides.

As for cash, the iBoxx IG index was 3bp wider in the week, HY 12.5bp and the CoCo index closed unchanged. If anything, the synthetic indices might point to some recovery in cash this week, although any tentative start to equities might dampen enthusiasm for cash credit (US equities closed off the lows, but still up to 0.4% lower).

We’re probably hanging all hopes on US tax reforms – or the progress of them and potential outcome, which are likely going to dictate how much higher equities can go and then whether euro-denominated credit spreads can tighten back to – or close to – those record levels of early November.

Our view? The cash corporate bond market has some legs in it yet. We’re viewing the recent weakness as a healthy pull-back, if nothing else. There was absolutely no panic from investors and it has not been forgotten on us that we had huge levels of issuance crammed into a two-week period where deals didn’t perform, and likely sullied sentiment a little. Better buying cares did emerge later in the week, suggesting that appetite for corporate risk remains intact. While the highest beta of product, the contingent convertible market, actually closed the week unchanged (as measured by the iBoxx index).

Primary set to slow a little into Thanksgiving

The month so far has piped up with €24bn of non-financial IG corporate bond issuance and if the current pace were to be maintained, we would be looking at close on €50bn for the month. That is unlikely given that we think there will be reduced – or no – issuance come the Thursday US Thanksgiving holiday, which usually also drifts into the big Black Friday events.

We closed out last week with a dual tranche offering from Holding d’Infrastructures de Transport (HIT) which took €1bn in a even split between long-5-year and 10-year maturities. Both tranches were priced 17bp inside the opening guidance for this low triple-B rated issuer, priced at midswaps+53bp and +93bp, respectively.

The high yield market also priced up a couple of deals as AT&S Austria Tech issued €175m in a PNC5 hybrid structure to yield 4.75% and Volvo Car Corporation (Ba2/BB+) lifted €500m in a long 7-year priced to yield 2% off an initial guidance of 2.375%. The demand for a bit of yield, it seems, is still there despite the recent weakness in secondary markets.

Those deals took the high yield total to €4.8bn this month so far, the best November month for years. For the year so far, we’re up at €66.7bn – which exceeds the previous best year by almost €10bn. The high yield primary market is flying.

Mixed signals

The markets closed last week offering a fairly mixed, albeit uncertain session. Stocks were up to 0.4% lower and government bonds slightly better bid, the 10-year Bund yield down at 0.36% (-1bp) and the US Treasury 2.34% (-2bp).

However, in a very subdued secondary market, IG risk was a touch better while HY a little weaker. In the synthetic world, iTraxx Main closed at 51.5bp (-0.6bp) and X-Over at 244.9bp (+0.5bp). The Markit iBoxx IG cash index also closed tighter, at B+100.8bp (-1.3bp) and the HY index edged wider (noise, really) at 287.5bp (+0.5bp).

We look forward to the UK budget on Wednesday, markets effectively closed for US Thanksgiving on Thursday and then Black Friday.

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.