31st October 2019

Picking the last of the low hanging fruit

iTraxx Main

51.7bp, +0.2bp

iTraxx X-Over

240bp, +3.3bp

🇩🇪 10 Yr Bund

-0.40%, -4bp

iBoxx Corp IG

B+113bp, unchanged

iBoxx Corp HY

B+407bp (+3bp)

🇺🇸 10 Yr US T-Bond

1.71%, -9bp

🇬🇧 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″]

Chapter 11…

The election season has kicked off in the UK, and in the US the Fed has cut rates for the third time this year with the jury out as to whether they will again in 2019. We still have slightly optimistic signals (limited truce?) coming from the US/China trade situation, with only the macro picture exhibiting weakness that might concern investors (or not) in November.

Nevertheless, it’s been a decent period for investors with a good recovery in risk markets over the past week especially, helping to prop up the excellent performance that most equities, rates and credit have managed to garner this year.

In macro, US GDP growth in Q3 has held up relatively well, exceeding expectations even as it weakened versus Q2. Germany is thought to be in recession (to be confirmed in a couple of weeks time), France avoided it as Italy’s economy has stagnated, while the Eurozone as a whole defied expectations with modest growth recorded in Q3.

There will be more rate cuts along the way in due course, we believe. The central banks will keep pushing against that string. Eurozone inflation fell to 0.7% in October and moved further away from the 2% target level. The ECB might be lifting €20bn paper from Friday but will likely look to further ease, possibly in Q2 2020.

For now, we ought to be a little optimistic for markets through this new month and into the end of 2019. And all that after a quite extraordinary year (already) for investors.

As the month ends on a weaker note, US and European equities are up by 20% or more so far this year still. Who would have thought? Fixed income’s performance has exceeded all expectations, too. Certainly, no one expected IG credit to return over 6% (they have been higher) this year, and that with Eurozone growth on its knees even the high yield market has returned almost 9%.

Indeed, the AT1 market, offering a product designed to fail – in extremis, has been scooped up and returned investors 14% year to date. Boring old Eurozone government bonds have returned over 8% so far this year (iBoxx index).

Credit investors will increasingly look ahead to what the fruits of their labour might bring in 2020. Some might seek to sell into the ECB QE bid, but such is the competition for new issues amid a parched secondary market, it’s not something we would envisage being a major dynamic. It’s extremely hard to get hold of bonds at the right price (palatable level).

Buy, hold, clip the coupon (where there is one) and redeem into the next deal.  That will be the driving dynamic.

The primary market has also delivered. Corporate bond investors have been super-receptive to deals and corporates have not been shy in coming forward. Issuance volume records are likely to be broken over the next couple of weeks in IG non-financials, but so well have the stars been aligned (rates, demand, fundamentals) that US domiciled borrowers have been taking advantage. Their participation in the market has been at a record level.

2019: IG primary record to be broken

After Daimler issued a whopping, increased €4bn of new debt on Wednesday (get it while they can before sentiment against auto companies turns even more), the IG non-financial total for the year-to-date rose to almost €278bn, and to just €7bn short of the record seen in 2009, which was €285bn. We think that €310bn+ must be the full year’s target.

E.ON added €500m in a no grow 12-year at midswaps+62bp on Thursday, which was 28bp inside the opening guidance with books up at around €3bn. It was the sole corporate borrower. As for October’s total issuance coming in at €26.7bn, it’s the best such month since 2014.

KPN (hybrid) and Fosun International added high yield rated debt on Wednesday and the month’s total rose to €9bn, with the ten months of the year total up at €57.6bn. That leaves us needing just under €5bn to record this being the second-best year for euro-denominated high yield issuance ever.

Financial corporate issuance drew a blank.

Defensive end to the month

And so the Fed played its cards very close to its chest and, in all reasonableness, they played a blinder. There was a little for the hawks and a bit for the doves. The jury might be out for a December rate cut, but at the moment the odds probably favour no further action this side of the new year. The incoming data, as ever, will determine if there will be any chance of that.

In Europe, the preliminary GDP and inflation data, as well as closing out positions at month-end gave a good bid to rates. There was some disappointment on a Trump tweet on the trade talks, suggesting that he was anticipating the signing of a limited deal (60% of the total offering). The PSA/Fiat merger also added much excitement, though.

Anyway, the FTSE still lost 1.1%, the Dax 0.3% and US stocks were up to 0.7% lower as at the time of writing, closing the day/month off the record highs achieved in the prior session.

Yields fell across the board and the rate rally will have added some to fixed income’s performance. It’s been an excellent ten months so far (see above). Anyway, 10-year Gilt yields declined by 5bp to 0.63%, the equivalent maturity Bund yield declined to -0.40% (-4bp), while even the Treasury yield dropped to 1.71% (-9bp) – trade worries the possible driver on this one (?).

Credit index saw protection better bid again (higher), which was to be expected given the defensive nature and tone of the markets of this final October session. So we closed with iTraxx Main edging up to 51.7bp (+0.2bp) and X-Over was 3.3bp higher at 240bp.

In secondary cash, the market was bit of a damp squib and closed unchanged leaving the IG index at B+113bp – 10bp tighter for the month. The AT1 market did the same, at B+462bp at the close or 40bp tighter for the month. In high yield, pretty much the same with the HY iBoxx cash index left at B+407bp (+3bp).

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.