30th January 2018

Not bad, considering

iTraxx Main

44.3bp, +1bp

iTraxx X-Over

239.4bp, +5.3bp

10 Yr Bund

0.68%, -1bp

iBoxx Corp IG

B+83.6bp, +0.2bp

iBoxx Corp HY

B+270.6bp, +8bp

10 Yr US T-Bond

2.72%, +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″]

Higher rates offset the good work

Benchmarked corporate bond portfolios have had an extremely good month. Total return players have dipped in and out of the red in performance depending on the direction of the underlying – yields much higher now! As we enter the final session of January, rest assured it will be fairly quiet given the FOMC’s rate decision is due after the markets close in Europe – and we’re at about the worst point for performance for IG (-0.4%) for the month.

Spreads, however, have tightened by 12bp (Markit iBoxx index). Some comfort has come from the AT1 market, which has continued the strong performance of 2017 into the new year, and delivered +2.6% of total returns. Unfortunately, it’s only a small part of any major portfolio with issuance for the product not even in triple-digit figures (euro billions).

The focus for the moment is on rate markets and the early stages of what is viewed as being a bear market for them – and whether in these early skirmishes, everyone else should be afraid? We have had a couple of sessions now where equities may not have displayed the same exuberance that they did for the 40 or 50 sessions before them, and Bund/Treasury yields in the 10-year have risen by 20bp or so.

Credit spreads continue to tighten across the board. There is still significant demand for credit and usually always is in the opening quarter of the year (fresh inflows plus high level of bond redemptions). This year (like last) is a little different because of the ECB involvement and the lower level of supply.

As for higher underlying rates per se, we see the barbell strategy in place for good reason. High grade corporate credit worthiness is improving markedly into a better macro dynamic and financial & non-financial spreads are tightening as a result, while losses (from a total return perspective) are offset by overweighting allocations to contingent convertible risk, for example. The latter has had a super January.

It does mean that returns from corporate bond investments are going to be lower this year as the sell-off in the underlying eats into them, but IG returns of say over 2.5% and HY returns exceeding 6% should be seen as an exception and not the norm.

Primary busy, but SSA focused

Alliander was the sole borrower in IG

Dutch utility Alliander was the only IG non-financial borrower in the market, in what was an otherwise busy session – but for SSA issuers. The Alliander deal was in the form of hybrid structure (PNC7.4), priced to yield just 1.75% for €500m, managing to attract a book of over €3.5bn. The final yield was against initial talk of 2%/2.125%.

On the SSA front, we had deals from the European Union, FADE and SFIL in euros while EIB and Municipality Finance were borrowing in sterling. Austrian real estate group S Immo AG issued a small, combined €150m in a two tranche offering. Greece is due with a 7-year probably sometime this week.

Macro bright, risk assets not so

The news on the macro front continued to point to sustainable recovery dynamics. Eurozone GDP growth was confirmed at 0.6% for Q4 and 2.7% for 2017. Spanish growth came in at 3.1 for the full-year, and at 0.7% in Q4/2017. Portuguese unemployment fell below the 8% rate in December to the lowest level in over 13 years, while youth unemployment was at just over 22% in the same month (versus 26.2% a year earlier).

Not so bright was the European equity markets playing catch up with the weaker US equity close in the previous session. We played out in the red from the start and were up to 1.1% lower as we closed in Europe. Currency strength for both sterling and euro versus the dollar didn’t help, but we would think that higher rates of late are also contributing to some of the jitters.

The story (as ever) though was in the US with the Dow, S&P and Nasdaq all taking a sharp leg lower from the open, and losing up to 1.4% (at the time of writing) – and struggling to claw anything back. It looks like the movement in rates are beginning to focus a few.

That said, at least we didn’t see a further material sell-off in rate markets. US Treasuries resisted any further material sell-off pressure to close a couple of basis points higher to yield 2.72%, while the Bund was yielding 0.68% (-1bp). It probably helped that German inflation for January came in at 1.4% versus expectations of a rise of 1.6% – and all fingers point to that currency strength offsetting increased oil costs. Gilts closed unchanged to yield 1.46% – all for their 10 year benchmarks.

With stocks moving lower and outside of their recently more established smaller intraday trading ranges, we had the synthetic credit indices come under some pressure as the cost to protect credit risk rose. iTraxx Main closed at 44.3bp (+1bp) and X-Over moved 5.3bp higher to 239.4bp.

In the cash market, activity was very limited owing to month-end, the risk off mood in the session and the FOMC meeting coming up on Wednesday. Illiquidity and reduced activity came to the rescue to the secondary market and IG closed barely changed! The Markit iBoxx index closed at B+83.6bp (+0.2bp) – the first daily reversal in almost three weeks. It is no coincidence that the sterling market only edged 0.5bp wider too. Credit in IG is looking resolute at the moment.

The same can’t be said for the CoCo market, which had been on a roll of late and spreads deep into record territory. There was some give-back here and index spreads rose 15bp to B+302bp. Finally, in high yield, we also closed wider, but again amid little by way of activity with the Street in its usual defensive mode when stocks take such a hit. The index was up at B+270.6bp (+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.