21st January 2018

Priced for perfection

iTraxx Main

44.7bp, +1.2bp

iTraxx X-Over

232.3bp, -2.2bp

10 Yr Bund

0.58%, +1bp

iBoxx Corp IG

B+88.0bp, -0.75bp

iBoxx Corp HY

B+274bp, +0.75bp

10 Yr US T-Bond

2.66%, +5bp

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″]

The sweetest of spots…

We’re three weeks in, and it feels like we are hanging on to current valuations. It shouldn’t feel like that. Macro is in good shape. Too many are anticipating a crash or correction of sorts. Yet prices are on an upward trend.

The correction won’t come while we ‘will it’ to happen. It will likely occur when we’re much more complacent. For now, though, US equities hover around or are setting record highs and a strong performance from the DAX on Friday saw it closing in on its record high, too.

Credit has had a mixed opening month. The IG non-financial and contingent convertible bond markets are well-bid and trading at record tights, while the market seems a little more circumspect about the high yield sector. The latter has seen just one deal in euros (several in sterling) – but few are chasing secondary where liquidity is ultra-poor and valuations deemed extremely rich.

Primary has also been mixed overall, with a not-so-flattering IG non-financial issuance level of under €16bn, a fairly solid €17bn+ in senior financials and an early opening of the AT1 market from RBI, taking advantage of the demand for this product.

There’s not much not to like about the markets. The big four regional economic powerhouses are ramping up in terms of economic activity and it is very fundamental in its make up. The US, China, Eurozone and Japan are seeing a solid push in industrial activity and those investment levels are ramping higher too. There are signs of higher inflation (producer prices) which might start to filter more into the consumer side, and all this as central banks are withdrawing their decade long policy accommodation.

The earnings season has got off to a good start in the US with only a few casualties, while the retail sector in the UK is having a much tougher time of it. In the grand scheme of things, the UK is too small to matter but her economy will be dragged higher in overall growth terms as the global economy powers ahead.

Happy Anniversary, Mr President

The failure to get a breakthrough in the legislation for funding federal activities in the US has seen to it that all but essential government services in the US are shut down. Don’t panic. It’s happened umpteen times before, and likely will again. The difference this time, is that we have President Trump at the helm.

In terms of market reaction, there will certainly be no bullish upswing in stocks like we have seen of late. So we might have a bit of a defensive feel to the mood as we open for business this week. Safe-havens will feel a slightly better bid. The next step – or for how long markets might feel vulnerable, or otherwise – will depend on how long it takes to get an agreement in place for a new debt ceiling. Activity might also be lighter as we have the first ECB meeting of the year this week.

Our view is that we can think of the stock markets playing out in a narrow rangebound fashion but with a bias to the downside, while there ought to be a better bid for US Treasuries – which will be much-needed given the relatively big sell off seen in the past few sessions! The shutdown news came after the market closed last week and into the vote, the markets were fairly relaxed about events. Hence our view that the moves on the back of the latest debt ceiling talks/vote setback will be fairly modest.

It’s boring – more records!

The IG cash markets squeezed a little more in last week’s final session. And valuations went deeper into record territory. Measured by the Markit iBoxx index, IG cash was marked at B+88bp with was 0.75bp lower in the day. The index has now tightened by 8.5bp in the opening three weeks of the year!

The rate sell-off, though, has eaten into returns and we are up only 0.15% YTD. Surprisingly, the CoCo index closed unchanged at B+309bp and we might have expected a fresh squeeze owing to the record closes on Wall Street (S&P, Nasdaq). The DAX was up by 1% and is less than 100bp from setting up a record high. That might not be Monday’s trade.

The synthetic markets were, curiously, more mixed. iTraxx Main closed 1.2bp higher at 44.7bp while X-Over was 2.2bp lower at 232.3bp.

The high yield market hasn’t been in the mood to play ball at all this year, and it was no different on Friday as it closed slightly better offered. The iBoxx index was left at B+274bp (+0.75bp) and underperformed IG cash and iTraxx X-Over, but high yield cash is up 0.5% in the year on modest spread tightened as it protected somewhat by the shorter duration of the product.

As for this week, we think credit markets will play out largely as they have done already for this year – a squeeze in IG, small moves up or down in high yield and more modest tightening in the CoCo market. Much will depend on the daily to’ing and fro’ing on the US political scene, while the ECB meets this week and will leave everything as is.

No change to the refinancing rate (0%), the deposit rate (-0.4%) and or the asset purchase programme (at €30bn until September). US GDP data is due at the end of the week, consensus estimates for Q4 being 3.0% and the PCE inflation gauge is expected to show pick up to 1.7% in Q4 (from 1.3% in Q3).

Finally, we’re ramping up on the earnings season, as the likes of Netflix, Caterpillar, GE and Ford release their Q4 numbers this week.

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.