27th June 2018

Policy on the hoof riles markets

iTraxx Main

73.8bp, -0.5bp

iTraxx X-Over

320.8bp, +3.3bp

🇩🇪 10 Yr Bund

0.32%, -1bp

iBoxx Corp IG

B+134.5bp, +2.4bp

iBoxx Corp HY

B+410.4bp, +7bp

🇺🇸 10 Yr US T-Bond

2.85%, -3bp

🇬🇧 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=”15″], [wp_live_scraper id=”16″]

That’s about it until September…

The markets are not being kind to primary credit at the moment, leaving a whole host of potential corporate borrowers possibly flustered. We think that the window to get deals away is open, but few dare pull the trigger while equities are falling so consistently and there is a clear bid for safe havens, just as there was once again in Wednesday’s session.

The persistent air of crisis doesn’t exactly breathe confidence into the corporate bond investment process. The runway is backed-up and we’re going to be well into July before this backlog has cleared – if it needs to be shifted before the summer break. That’s because there’s a lot in the pipeline which can wait until the September reopening. Some will choose to wait so as to not pay up.

Overall, we would think that it has been a poor opening half of the year for the primary corporate bond market, where only the high yield sector could say that it has a better than expected time of it. Although even here, issuance levels have dropped a little more than most would have anticipated given the flying start.

With no corporate issuance on Wednesday (SSAs only), we’re not going to see much get done over the two final business days to redress the meagre levels of the deal flow. IG issuance for June so far comes in at €20bn versus €35bn in June 2017, while the opening 6 months has us at €115bn of non-financial supply versus €164bn for the corresponding period in 2017. The high yield market has come up with €41bn of deals and this compares favourably with the €75bn record level of issuance for the whole of last year – and versus around €35bn for the first half of 2017.

The potential event risk has been a thorn in the side of the risk markets over the past couple of years, but it has become much more elevated of late, even the twin attack on the status quo (establishment) by the new Italian government and the old world order by Trump’s tariff regime.

Credit spreads are wider (+35bp in IG, iBoxx index for example), underlying yields are lower but new issue premiums are rising to reflect the change in perceptions amid mounting economic and systemic event risk. Still, overall funding costs are still at relatively low levels and we couldn’t expect them to remain at historic lows ad infinitum.

We’re being told constantly that the end is nigh as such, that Trump’s trade war will tip the balance and plunge the global economy into a recession. Central bank firepower and the effectiveness of it might not do the trick next time, should we be plunged into a global financial crisis which is easy given the huge rise in global indebtedness over the past decade. And we haven’t even got onto the subject of the US rate cycle.

So it doesn’t look good right now. In Europe, the Italian government looks like it is maintaining a hard stance against the EU’s economic and immigration policy after being relatively silent on the issue in the past week or so. Few are being blasé about the risks posed, as they might have been in the past. Draghi might not be in a position next time to ‘do whatever it takes’.

Then there is the Brexit issue, simmering nicely under the surface ahead and threatening an acrimonious collapse not helped by the EU negotiators’ continually knocking back on any reasoned compromises which might be offered them.

Trading the headlines

A softening in the rhetoric around the regime for how Chinese inward investment into the US is assessed led to an abrupt turnaround in the equity markets as they moved from being up to 0.6% lower to 1% higher in Europe. US equities were 0.5% or more higher, at the time of writing. Given that it wasn’t the worst case scenario (a separate new system would have riled much more), a sense of relief filtered through the markets. We might just claw back some of the losses of the previous few sessions and save some of the monthly/quarterly performance.

Rates tried to offer flimsy resistance to the headlines, but held their ground a little better. Business spending in the US declined more than expected, down 0.2% in May versus +0.5% expectations. 10-year benchmark yields all declined. The Gilt was left to yield 1.25% (-5bp), for US Treasuries it was 2.85% (-3bp) and Bunds were a touch lower to yield 0.32% (-1bp).

There were times in early June when spreads were looking like they were on a sustainable tightening trend into hopes that the Italians would cede to a softer stance and Trump wouldn’t ramp up the tariff war. We’ve been on a widening trend for the best part of a fortnight and with just two sessions to go, are wider for the month now. Total return investors will be a little more content, returns for the month currently flat in IG, for example, as the rate curve has rallied.

As for Wednesday, there wasn’t much for corporate bond markets to focus on. Primary drew a blank and secondary was its usual limited self. iTraxx Main closed a touch better offered at 73.8bp (-0.5bp) with X-Over slightly better bid and left at 320.8bp (+3,3bp) at the close.

In cash, it comes as no surprise that we were better offered and it left the iBoxx index at B+134.5bp (+2.4bp), the high yield index 7bp wider at B+410.4bp. For high yield, we’re 130bp wider year to date and at the widest level this year for the index.

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.