7th April 2019

Momentum still with risk-on

iTraxx Main

60.5bp, -1bp

iTraxx X-Over

253.8bp, -1.7bp

🇩🇪 10 Yr Bund

0.00%, unchanged

iBoxx Corp IG

B+134.6bp, -0.6bp

iBoxx Corp HY

B+415.4bp, -2bp

🇺🇸 10 Yr US T-Bond

2.50%, -1bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Steady as she goes …

The opening week of April has delivered in the same fashion as the opening quarter, for credit. Primary is churning out deals and the receptivity towards new offerings remains robust with investor interest at very high levels. Credit spreads continue to tighten at a rate of knots, showing little sign (no sign) of wanting to back-up with 6bp of IG tightening in the iBoxx index already in the first week of the new quarter.

Underlying yields might have retreated but most of the big moves have come at the longer end and so total returns haven’t given much back. We’re sitting on IG returns to date this year of 3.3% (super) with spreads tighter by 38bp. The high yield market has returned 5.8% so far this year (excellent) on iBoxx index spreads 108bp tighter, and all that into broad macro weakness.

Mind, equities are also having a ball. The Dax index is up 14%, the FTSE showing little Brexit-trouble gaining almost 10% so far this year, and the S&P up around 15% – itself exhibiting little strain of a slowing US economy. The US yield curve is suggestive that a recession is in sight and low interest rates/likelihood of no rate increases this year from a dovish Fed at least suggest we are in a period of macro weakness – but these indicators are being ignored by risk markets.

For instance, the usefulness of the yield curve as a reliable predictor of a recession is being questioned given the massive manipulation of rates (QE) over the past 10 years.

Low growth and low rates for longer is back with us and cheap liquidity for longer is the drug of choice which the market continues to use to prop itself up with. Asset prices (bubbles) continue to inflate. This year is beginning to feel like 2016/17 in terms of performance.

Primary hoovers up the cash

We closed last week in dull fashion, with little happening in the final two sessions as we awaited the non-farm payroll report – but investors will have taken the opportunity to draw breath from the previous breakneck pace of the activity in the primary market.

The opening week of April took in €8bn of IG non-financial issuance and we are on course for another €25bn+ month with potentially a couple of good weeks ahead of us before we slow down into the long Easter weekend. For the year to date, IG non-financial issuance has reached an impressive €92bn.

That is already in excess of the full four-month period last year (€70bn) and is just €12bn short of the €104bn in the opening third of 2016. The target must be that €104bn, while we believe the €131bn seen in Jan- end April 2015 is out of reach. Our full-year target of €200bn is now woefully too bearish and we must now be looking for somewhere of the order of €250bn+ for the full-year (which would align itself with the levels seen in 2014-2017).

Last week’s deals were taken down impressively well. Oversubscriptions typically were in the 3-7x range, cheap pricing allowed final costs to print to be rammed tighter – by up to 50bp in a couple of cases, and most offerings were trading tighter versus reoffer.

The high yield market had a good week, with deals beginning to filter through with a little more regularity. The €2.9bn from 8 tranches took in the high double-B rated €500m Holcim hybrid (which would have attracted almost entirely IG investors), Loxam’s dual-tranche combined €500m offerings and smaller offerings from SGL Carbon and Otto.

We even managed €7.2bn of senior financial deals, taking the year to date total to just past the €50bn mark. The run rate usually slows down from here, but again, our year-end forecast is looking too low and we must be looking at around the €150bn+ area for 2019.

Friday drew a blank in all corporate debt issuance markets.

Rocket ship?

As for Friday’s session, moderate risk-on was the dynamic. We were tighter in credit spreads and higher in equities and rates did very little. The US added a better than expected 196k jobs in March but wage growth had slowed (to 3.2% year on year, from 3.4% previously). So overall, the market was content to believe that the Fed will stay on hold for the foreseeable future. There was further ‘drama’ as Trump added his two cents worth demanding that the Fed embark on QE (!) rather than continue to trim its balance sheet, suggesting QE would turn the economy into a rocket ship.

US stocks added upon to 0.5%, the Dax gained just 0.2% and a weaker sterling boosted the FTSE which closed 0.6% higher. There’s trouble ahead for German auto makers as the EU investigates allegations of collusion between BMW/Daimler and VW on limiting the development and delaying the roll-out of cleaner emissions technology. This might just see the bid for cash come under pressure and the CDS will be better bid (wider) as we assess the likely impact on any fines (can be 10% of revenues). Daimler being the whistleblower will be spared!

Rates didn’t do too much leaving the 10-year Bund to yield 0.00% at the close, the US Treasury in the same maturity 2.20% and Gilts 1.12%.

In credit, the indices edged lower with iTraxx Main closing the week at 60.5bp (-1bp) and X-Over 253.8bp (-1.7bp).

The cash market was similarly poised, edging tighter with investors largely sidelined into the non-farms report. The iBoxx IG cash index was left at B+134.6bp (-1bp) which is 5bp tighter for the week and 38bp tighter for the year with returns for the year approaching 3.5%.

After a bit of a wobbly into the end of the last quarter, the AT1 market has found some support again. The index is now at B+563bp (-14.5bp on Friday) which is 37bp tighter last week and almost 150bp tighter this year – with returns year to date at a massive 6.6%.

A few more deals were absorbed in the high yield market during the week, but we drew a blank on Friday. The generally better tone though helped the Street tighten up the market and left the iBoxx HY index at its tightest level of the year at B+415.4bp (-2bp), leaving investors sitting on returns of 5.8% for the year so far.

And so, on to this week. As ever, we’re still in the thick of it regarding Brexit and we have yet another crucial week ahead. An emergency summit, UK requests for a delay and yet another set of indicative votes await us. The ECB is up on Thursday but we don’t expect anything new to emerge from the meeting. The first quarter’s earnings kicks-off on Friday with Wells Fargo and JPMorgan getting the ball rolling.

Have a good day.

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.