10th February 2017

Play it again, Sam

FTSE 100
7,231, +42
11,641, +98
S&P 500
2,308, +13
iTraxx Main
73.5bp, -1.5bp
iTraxx X-Over Index
299bp, -4bp
10 Yr Bund
0.31%, +1bp
iBoxx Corp IG
B+137bp, -0.6bp 
iBoxx Corp HY Index
B+382.5bp, -1bp
10 Yr US T-Bond
2.40%, +6bp

Wake me up before you go-go…

What goes up usually goes down later, and vice versa. In this “let’s find our feet” session, equities were only much better late into the session as it felt all too tentative for most of the day, while government bonds edged a touch weaker in price. The third component of the equation added little, as credit was only slightly better bid.

For once, however, the negative news (on the headline front) was quite limited as we were hit with a raft of Q1 earnings reports which in the main were better expected.

The week overall has lacked any conviction and has failed to move in any firm direction as a result – until late into yesterday’s session. The market lacks certainty right now (good or bad), and sitting out – as we suggested yesterday – has become the best policy. The storm clouds are relentless and as soon as one passes, another emerges.

That pattern looks like it will define 2017 – the first half of it anyway. While most of the uncertainty is around US politics and then the French elections, there’s much still to go around Brexit with the UK government set to trigger Article 50 in the next few weeks (with the bill having passed through Parliament this week).

That defensive bias has seen a mixed reaction to credit markets. Spreads have edged wider this year – we think on the back of low levels of activity on secondary (and primary for that matter), as the Street has largely become defensive on any bidding cares. The ECB has been buying close to an average of €2bn per week of IG debt but failed to stem the weakness.

The markets would be much weaker if the ECB wasn’t involved. But returns have recovered – especially in the last week – as the rally in government bonds has pumped up prices. This has been most evident in the sterling corporate bond market where a near 1% deficit at the end of January takes returns in that market to flat YTD.

As things stand, the issues listed above are not going away anytime soon.

Primary offers the same frustrations…

Klépierre: €500m 10-year deal

French real estate group Klépierre was in the market with a €500m 10-year deal at midswaps+67bp. So far, so good. However, the statistics show that the deal garnered orders of just €1.5bn – but the leads saw fit to tighten up the pricing from initial guidance of midswaps+80/85bp, leaving a new issue premium of 5bp (fair value was +62bp) and final pricing was at the tight end.

The book dropped to €950m, meaning around a third of the orders were lost – that is a lot. The key takeaway being that at least some investors remain disciplined, even if the syndicates are not.

It’s not for us to be cynical, but Klépierre is French and OATs have widened considerably in 10-years although they bounced back a little yesterday. So, why bother with corporate risk for a relatively small pick-up when one can but sovereign risk and liquidity!

More generally, we would think a number of dynamics are at play. They’re going out with super-cheap initial guidance to get the interest in (mind, they usually always have). We’ve been so used to deals being tightened by 10-20bp that perhaps not enough investors are questioning that particular strategy by banks.

Surely – and even for deals not massively oversubscribed – investors can’t be nervous about getting enough of a fill? We think that for the Klépierre deal, the borrower benefited from the lack of euro-denominated corporate competing supply and/or investors are still reconciling the ECB’s interest and how that might alter the number of bonds in the free float.

Whatever, investors are too frequently buying bonds with the proverbial gun to their head and no ‘get out’ clause. With the odds stacked against them, that can’t be good amid need for a fairer and orderly functioning of the market.

Verallia: Another French deal, this one for €350m

There wasn’t a non-financial IG deal in the euro markets, but BP became the latest of a host of borrowers to issue in the sterling markets with a £400m effort in an 8-year maturity at G+105bp versus initial guidance of G+105/110bp. Now there’s something to think about in that pricing dynamic, given that a less fragmented investor base holds sway in the pricing process.

There were a couple of deals in the HY market – and at the riskier end of it at that. PIK deals came from ICBPI (Mercury BondCo) for €600m and Verallia for €350m. That is €2,150m of high yield rated issuance so far this month – which is excellent, and compares with just €3,550m from the IG non-financial market.

Safe-haven valuations correcting, late rally in equities

After a difficult week, French OATs saw some price recovery with the 10-year spreads versus Bunds down at 68bp, having touched 78bp into some election-fueled jitters earlier. The 10-year OAT yield has declined 16bp in just two sessions.

Even BTPs saw recovery, with 10-year yields down at 2.18% versus 2.38% a few days ago. Still, we can’t helping thinking that we are just a headline away from another a pop higher in yields. Oversold they might have been in the first place, but we would look at the lower yields over the past couple of sessions with much suspicion and care should be taken. Lest we forget the IMF and Eurozone jostling for position over Greece.

Bund yields back-up a touch, the 10-year at 0.31% (+1bp), while the equivalent Gilt yield was up more to 1.24% (+3bp). 10-year US Treasury yields were up at 2.30% (+6bp). European equities gathered steam into the close helped by roaring US stocks (S&P, Dow and Nasdaq all saw record highs) on the promise of a major corporate tax reform agenda to come from the Trump administration.

In the corporate bond market, the BoE announced that it had lifted another near £500m of IG non-financial corporate debt in the last week, taking the total QE-related purchases to £6.59bn in just under five months of an 18-month programme for a total interest of £10bn. They will finish early.

And this level of activity by the bank, in an already very illiquid market – albeit amid higher levels of supply than we might usually get – is certainly serving to keep spread valuation intact and secondary market volatility at low levels. The cash market closed the session unchanged.

In the euro-denominated secondary markets, we edged better with the Markit iBoxx IG index at B+137bp (-0.6bp) with the same kind of movement in the HY market, the iBoxx index left at B+382.5bp (-1bp) – all amid little activity. iTraxx Main closed at 73.5bp (-1.5bp) and X-Over fell back through 300bp, to close out at 299bp (-4bp).

It will be a quiet session to end the week with the half term holidays ahead. Have a good day; Back on Monday.

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.