29th August 2017

That old chestnut, North Korea

iTraxx Main

57.5bp, +1.6bp

iTraxx X-Over

246.7bp, +4.7bp

10 Yr Bund

0.34%, -4bp

iBoxx Corp IG

B+110.8bp, +1.4bp

iBoxx Corp HY

B+302bp, +4bp

10 Yr US T-Bond

2.14%, -3bp

FTSE 100 (live) [stock_ticker symbols=”INDEXFTSE:UKX”  static=”1″ nolink=”1″] DAX (live) [stock_ticker symbols=”INDEXDB:DAX”  static=”1″ nolink=”1″] S&P 500 (live) [stock_ticker symbols=”INDEXSP:.INX”  static=”1″ nolink=”1″]

Kim’s a wrong’un…

With most investors returning to their desks, we should have been discussing the lack of supply that we faced through August and how the sluice gates will ratchet open for a ‘Super September’ month of issuance. Or how total returns in fixed income (credit especially) have come up positive through a choppy few week – even as credit spreads have been marked wider in liquid and defensive Street positioning.

Or how the economy in the Eurozone continues to show signs that it might be time we take it off the ventilator and perhaps let it breathe on its own. Trump may have botched the Charlottesville response but the markets have seen that off.

But we’re actually back to the geopolitical event risk around North Korea as our main flashpoint as we look to close out August. The North Koreans’ firing of the ballistic missile over Japan is a serious, new development and heightens further the risk of retaliatory military action. On the follow, the market reaction was as predictable as one might expect. Equities dropped hard (DAX by almost 2% at one stage, not helped by the strengthening euro either) and all bourses are now in negative territory for this the month. Safe-haven assets were in vogue, meaning that government bonds were better bid.

In so far as it could be, it was also risk-off in corporate bond markets but we saw some issuance – and in the form of senior financials, for the first time this month. Better late than never! And we would think that there seems to be a level of pragmatism in the corporate bond market. Illiquidity is the investors’ friend in that few will sell and move to government bonds – as we might have expected, say 20 years ago. Few sell now because as well as needing their exposures to higher yielding (versus govt. bonds) corporate debt, it is nigh on impossible to rebuild a position at a reasonable level.

So, that weakness in credit doesn’t mean credit that is “correcting”. Not in the sense that valuations are deemed too rich. The weakness reflects a defensive Street bid for risk in light of that missile test and the potential for a US/Japanese/South Korean response. The immediacy of the weakness in credit is seen in the synthetic iTraxx liquid risk proxies with Main and X-Over better bid (protection costs sharply higher), while the evening marks going in on the cash market will have seen higher beta corporate debt under some pressure (without the corresponding flow to justify it).

Defensive opening to the week

The 10-year Bund yield was down at 0.34% (-4bp) while US Treasuries in the same maturity were offering 2.14% (-3bp). Amazingly, the 10-year Gilt yield is back at 1% (-6bp in the session) – and some 22bp lower in August – again probably on a combination of those geopolitical concerns was well as apprehension centred on the latest Brexit showdown. Most predictions this year have consistently had these yields go materially higher. Event risk – or the possibility of it, has seen to it that a bid for government bonds remains intact.

The Bund yield in the 10-year maturity has spent more time below a yield of 0.50% than higher and that even after the huge noise around the potential for tapering to come by the ECB. The equivalent US Treasury has broken above a yield of 2.50% only sporadically in the same time frame.

Anyway, into the European close, equities managed to claw back some losses as the US indices came off their early session lows. It left the FTSE nursing losses of 0.8%, the DAX around 1.5% with US indices mixed.

Westpac: 2 x €750m tranches

New issue supply wasn’t impacted as we might have thought it would be given those events and market moves highlighted above. We had several mandates awarded and with it issuance in senior financial debt from UBS (2 tranches of shorter dated debt for a combined €3bn at the OpCo level), and dual tranche 5.5-year/10-year maturity offering from Westpac for a combined €1.5bn.

They’re the sole public markets borrowers in senior financial debt this month! As a reminder we’re at just €4.5bn for IG non-financials and €625m for HY issuance. That’s all about the best we might expect for an August.

In the secondary corporate market, volumes as ever were extremely light. But that didn’t stop us from seeing spreads marked defensively into the geopolitical furore. That meant that the cash IG corporate Markit iBoxx index closed at B+110.8bp (+1.4bp) and the HY index at B+302bp (+4bp).

The iTraxx indices were left a little higher with Main at 57.5bp (+1.6bp) and X-Over seeing 246.7bp (+4.7bp) into the close.

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.