9th January 2018

Record breaking is the new normal

iTraxx Main

44.0bp, +0.2bp

iTraxx X-Over

226.7bp, +1.3bp

10 Yr Bund

0.46%, +3bp

iBoxx Corp IG

B+91bp, -0.5bp

iBoxx Corp HY

B+273.8bp, -+1.8p

10 Yr US T-Bond

2.53%, +5bp

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″]

Higher and higher…

The non-financial corporate deals in the session provided a useful distraction from the daily chore of watching the credit market go tighter. In a market where nothing should be taken as a certainty, the spread market’s tightening is about as much as a ‘gimme trade’ if ever there was one. Equities are leading the charge, as the upbeat investor sentiment feeds into ever higher levels and records indices in more indices globally.

Credit can and will only follow. The opening week and half of this year has seen the customary bullishness into yet another session where the macro data was again extremely upbeat. It took in Eurozone unemployment back at 2009 levels as it fell to 8.7% with all regions contributing to the decline. Meanwhile, industrial output increased by 3.4% in November in Germany and the country’s exports grew by over 4% in the same month. The stronger euro is failing to have an impact, yet.

The current economic solidity and recovery dynamics and the macro outlook are the current drives for the bullishness in the markets. Inflation will have to come to the fore soon. It can’t defy gravity for much longer, surely. It will manifest itself in higher wages, while consumer and producer prices will also start to feel some heat. When that comes rate markets will react, while policy remains benign through this year in the wider European area. So we have a good chance that risk assets will continue to rise but that any euphoria will eventually be tempered as the ECB’s day of reckoning gets closer. The brakes will be applied in 2019, and we will need to start positioning for it in Q4 of this year.

Until then, we’re going to anticipate a steadier rise in prices. The opening week’s rally will not be a harbinger of things to come. That rapid spread tightening, for example in credit, is unsustainable. Some of it might have been driven by the need to get some risk on board that wasn’t executed through December for portfolio and/or liquidity reasons, while we would think that the offered side became a little more expensive into the upbeat tone everywhere. Whatever the prevailing explanation, the corporate bond market has little to worry about at the moment.

Primary flush with deals

Deutsche Bank: a combined €2.5bn

There was little holding back in primary in the session. French Telecom group Orange SA lifted €1bn in a 12-year deal priced finally at midswaps+37bp and 18bp inside the opening guidance level, off a €2.6bn book. Enel followed up with €1.25bn of its own funding with a green bond in along 8-year maturity at midswaps+47bp and also 18bp inside the initial price talk.

Rounding off a good session for the IG non-financial market was AB InBev‘s three tranche deal for a combined increased €4.25bn which saw a 6.25-year floater and 9-year and 17-year maturity fixed deals. They were priced 12-15bp inside the initial guidance. That took the daily total to an excellent €6.5bn and we are up at exactly the €10bn mark for the month so far in deals from IG non-financial issuers.

In financials, Santander issued €1.25bn in a 7-year non-preferred format midswaps+60bp and Deutsche Bank followed with the same format in 3-year and 10-year offerings for a combined €2.5bn, at midswaps+40bp and 95bp, respectively. For good measure, they printed £300m at G+120bp in senior non-preferrered format, as well. That’s €11bn which has graced the markets so far this month in euro-denominated senior bank debt.

The high yield market drew a blank once again. On the sovereign side, Mexico were in for €1.5bn in a long 10-year maturity at midswaps+85bp.

More records… what else?

It’s become the norm that we now set records across several markets on a daily basis. We must guard against complacency, but for credit, the deal flow or the demand doesn’t quite smack of exuberance. We’re taking down deals just as we were through 2017 (and before, for that matter). We have good oversubscription, tightening by 10-20bp versus the initial guidance and some performance on the break to follow. It keep the market machinery ticking over and everyone content.

So the equity markets rose across Europe by a small amount, while US markets opened setting new intraday records and they powered ahead after a tentative open. They were helped by an upbeat comment from Boeing on 2018 deliveries while US oil production was set to rise to record levels in 2019, according to the EIA. Rate markets sold off, though, and we had the 10-year US Treasury yield up at 2.54% (+5bp) – and now look for signs of investor buying interest as the 2.50% comes up. Bunds yields also rose, the 10-year yield up at 0.46% (+3bp) and the equivalent Gilt was yielding 1.28% (+4bp). As for crypto, Bitcoin was steady at $15,000 per coin, at the time of writing.

The synthetic indices edged wider for the second session running, with Main up at 44bp (+0.2bp) and X-Over 1.3bp higher at 226.7bp. They’re now 1bp and 7bp lower, respectively, this year. Cash credit has definitely outperformed synthetic credit in these opening sessions, which we might have expected, given the closer correlation to booming equities the latter has.

The IG cash market edged better, as measured by the Markit iBoxx index, which saw a new record close at B+91bp. That’s 5.5bp tighter already this year and just 6bp from the target we had set for the index by year-end. Good reception to deals in the primary market along with those better equity markets breeds confidence and that has filtered through into IG credit.

Finally, the high yield market isn’t seeing anything at the moment in primary and we could have expected more of a squeeze, as against the paltry tightening we have seen thus far (12.5bp for the iBoxx index). Still, in tune with the general upbeat tone, the high yield market is better bid (reluctantly we think) and the iBoxx index ended the session at B+273.8bp (-1.8bp).

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.