31st March 2017

Starting over

FTSE 100
7,370, -4
12,256, +53
S&P 500
2,368, +7
iTraxx Main
74.4bp, unchanged
iTraxx X-Over Index
290.5bp, -1.5bp
10 Yr Bund
0.34%, unchanged
iBoxx Corp IG
B+129.8bp, unchanged 
iBoxx Corp HY Index
B+368.4bp, -0.4bp
10 Yr US T-Bond
2.41%, +2bp

Another box ticked

Article 50 has been triggered, leaving the establishment to get on with the negotiations. The market can now get on with looking forward to the French elections; It’s the next event-risk ‘to get through’ box to tick. They’ve come thick and fast since the middle of last year but asset valuations have held their own.

Equities are at or close to record levels, government bond yields off record lows but still at very low levels historically and credit markets are moving along nicely displaying little of the volatility that at times has beset equities and government bonds. The penultimate session of the month endured mixed emotions. Inflation got off its February/early March high with some lower than expected inflation prints in Spain and Germany following. Food for thought on the rates front. Equities floundered in no-mans land, government bond markets got a slight bid behind them early on only to end flattish, and credit played out to a good level of issuance to keep investors occupied.

Santander: £500m CoCo

Primary saw markets playing catch-up in the financials sector after a lull in activity over the past week. The subordinated sector was particularly in the ascendancy with a bunch of deals taking in euro-denominated T2 deals from Bankinter (€500m) and Jyske Bank (€300m) and a sterling CoCo from Santander (£500m). Swiss insurer Helvetia plumped for a 30.5NC10.5 structure and €500m in a subordinated offering.

In senior, we resumed issuance activity with Bank of Nova Scotia (for €750m) and a tap of €500m from BNPP of its senior non-preferred of September 2022. BUPA Finance took £300m. The total senior issuance for March comes in at €17.1bn with just today’s session to go.

IG corporates saw just American Tower taking 8-year funding for €500m, while the high yield bond market delivered Motor Oil (€350m) and German chemical group K+S in a 6-year €400m deal. The latter two deals in the HY market easily took us over the line for a €10bn+ month in issuance from this sector in one of those fairly rare occasions for this still small market (gross annual supply in European high yield has been in a €40-50bn range over the past 3 years). The IG non-financial monthly issuance total comes in at €37bn.

What ides of March?

We go into the final session of the month having delivered much. Returns across most markets will have enjoyed a good push with markets in the mood to swat aside many of the potential hiccups which came our way. Basically, it was a good month for most investors. Fixed income market investors are thought to be under much threat this year from a performance perspective. Growth fears – that is, a return to sustainable growth – have weighed on policy rates with the Fed in tightening mode. Inflation fears have made the ECB sit a little more uncomfortably as their targets might come into view – although the Eurozone’s core rate is stubbornly stuck at below 1% (versus a 2% target level). Geopolitical event risk has also played a part. So fixed income has reacted – or not, actually. All combined, they have left market yields playing out in a tight range throughout the month.

So, government bond yields have largely been anchored in their established ranges and never really threatened to break out of them save for a day to two of nervousness around the Fed meeting. Now, as we close out March, they are heading towards the lower end of those ranges. That is, for the 10-year Bund we think a range of 0.30 – 0.50% has been established, while for the US Treasury in the same maturity bucket, we’re in a 2.30 – 2.60% complex. The brouhaha around the UK/Article 50/EU has failed to see Gilts affected by much volatility, with yields on the 10-year Gilt heading to 1.10%. Even sterling has bounced.

As for the credit market, IG corporate bond spreads as measured by the Markit iBoxx index have tightened by 8bp in March – and to their lowest level of the year, but total returns for the month fell by 0.4%. For the year so far, IG corporate credit returns are up at around +0.3%. In the sterling corporate bond market, spreads widened by just a basis point and returns in the month have posted a +0.1% return, while YTD returns are showing at being over 1%. The moves in their respective government bond markets have been the drivers for returns in credit given the moderate movement in spreads.

And the same goes for the HY market. Spreads have tightened by almost 50bp this year, and are amazingly unchanged in March (iBoxx index). Total returns have fallen by around 0.2% in the month, but are up at a stellar +1.6% YTD. These numbers make sense for the high yield bond market in Europe, given that it is a shorter duration asset so total returns are protected somewhat in the event of a government bond market sell-off. And spreads have had a good time of it on the back of improved economic fundamentals pushed along with perky equity markets.

Q1 almost done and dusted

The first quarter draws to a close today and we generally come into it following a lacklustre session. In the government markets, yields fell a little/were mixed – the yield on the 10-year Gilt at 1.12% (-3bp), the Bund at 0.34% (eventually unchanged after being lower) and 10-year OATs yielding up at 0.94% (also unchanged). Oil continued a mini revival, with the WTI measure up at $50 per barrel. Equities played out in a small range around +/-0.3% depending on the jurisdiction.

In the secondary corporate bond market, IG corporate risk valuations closed unchanged with the iBoxx index at B+129.8bp in a lacklustre session. It wasn’t very exciting. And the same goes for secondary sterling, where the market closed a touch wider, for choice. Returns edged higher on the back of the rallying underlying.

Completing the cash markets day’s action, focus in HY was on the new deals – where we can say that the €10bn+ of supply has seen barely any weakness in spreads in secondary. If anything, it has promoted a bit of confidence in the asset class. There is money to put to work. Anyway, the high yield bond market closed the session unchanged!

And finally, the iTraxx indices closed with Main at 74.4bp (unchanged) and X-Over a touch lower at 290.5bp (-1.5bp).

Have a good day, back in April.

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.