22nd April 2018

Rate market limelight

iTraxx Main

54.8bp, -0.3bp

iTraxx X-Over

274.7bp, -0.4bp

10 Yr Bund

0.60%, +1bp

iBoxx Corp IG

B+103bp, unchanged

iBoxx Corp HY

B+313.5bp, +2bp

10 Yr US T-Bond

2.96%, +4bp

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″]

Warnings signals abound…

There was much good last week for the markets. The rally in equities through the first part of it, the broadly good start to the earnings season with financials leading, and the moderate recovery in credit spreads. There has been no obvious escalation in the Syrian/US troubles, while the potential for de-nuclearisation in North Korea moved a step closer. We ended, though, a little worse for wear, even as the party had previously barely got going. The excuse as always was the trade war, but rising oil prices threaten to push inflation higher just as we ponder whether the US will hike a further two or three times this year.

Mark Carney: Calm on rate hike

The market is now skewed towards expecting three further hikes this year. The US Treasury market is reacting as the 10-year closes in on 3.0%. The dollar might eventually find a better bid as well. Treasuries have dragged other rate markets with them and the Bund yield popped higher last week, as did the Gilt market – even if Carney seemed to be talking down the prospect of a rate hike in the UK next month.

As suggested above, most markets were under pressure and it’s difficult to gauge how we might trade out this final week of April. Equities ought to be boosted by a US earnings season which has got off to a good start and will likely continue to deliver, but the weakness in rates amid growing expectations for those three further US interest rate hikes for this year are having an impact. Bund yields are being dragged higher with their US Treasury equivalents.

So it seems like it is the rate markets which are going to weigh on other markets. The Fed will probably go too far, too quickly as they focus on the domestic economy (payrolls, inflation, state of the industry) which means equities have likely seen their best levels for the year and US credit might see further spread pressure. Higher funding rates will also start to eat into Asian and other EM credit, setting us up for a difficult period into year-end, probably.

In credit in Europe though, we seem to be on a surer footing of late. The market across both the high yield and investment grade sector held relatively stable throughout the week. Admittedly, secondary market activity remains a busted flush as the decade-long squeeze on liquidity and the ECB’s QE haul continues to keep investors away and mainly focused on primary.

Frustrations, though, are building with those primary markets in corporate IG. Here, non-financial primary issuance has been a bit of a damp squib of late following a promising, decent level of deals at the beginning of the month. The high yield market is roaring ahead though and we are well ahead of last year’s run rate which eventually produced a record level of issuance. As things stand, we’re on for setting a new record for issuance this year – the pipeline remains in good shape, and there will be several deals printed this week.

Primary is where the heart is

Paper and packaging group Mondi PLC pitched in with a deal at the death last week to take the total for the 5 days to a less than emphatic €2.6bn from four IG non-financial rated borrowers. For the month, we’re up at €13.2bn and just €68.2bn for the year to date.

Primary Issuance

It’s poor. We might have anticipated €30bn of issuance for the month, but now, if we get €20bn with 6 sessions to go, it will be a good result. The window is open but the visibility on IG borrowers is very limited. Much might also depend on how the markets play out generally, given the back up in rates and weakness in equities (in the US) as we closed last week.

The high yield market, however, is delivering more than we might have envisaged. The unrated Iliad is included in our statistics (€1.15bn issued), and the sector threw up a mightily impressive €5.5bn worth of deals last week from the likes of OCI, Softbank, Adler and Gestamp Automoción to name a few of the borrowers. There are more deals lined up for this week. The month has given us €7.1bn in issuance and the year to date tally is up at €26.1bn, leaving us well on the way for a record amount of supply (more than €75bn) as against our expectations that the market would only see €55-60bn worth of deals.

The demand for risk is clearly there in abundance given the receptivity to most deals and we’re beginning to see less of them wider on the break. The broader macro tone has been supportive of late, but much will now depend on how markets trade out the higher market rate environment. Geopolitical risks seem contained for the moment.

Yields up, equities lower, credit stable

So we had US Treasuries close with the yield on the 10-year up at 2.96% (+4bp) and at the highest level since early 2014. The Bund yield moved higher too, but the big damage there was done in Thursday’s session, closing just a basis point higher on Friday at 0.60%. Gilts were more stable, just a basis point higher for the 10-year at 1.49%.

In equities, most markets were lower, the S&P lost 0.9% to 2,670 – up just 14 points in the week, and back to a shade lower for the year to date. In Europe, the Dax has been on a roll of late, recovering some significant losses in the opening quarter through this month, and was up 100 points last week – but still 377 lower year to date, or 3% (it has been off 9%).

As for credit, we closed out last week rather unnoticed and for once, there was a sense of calm in the market. As we said earlier, the market has been fairly stable in secondary and perhaps better bid for choice. At B+103bp, cash secondary (iBoxx index) closed unchanged on Friday and 1.4bp tighter for the week. It probably helped that there was so little from primary in this market. That said, we only edged 2bp wider in high yield on Friday, which left the Markit iBoxx index at B+313.5bp – and 3bp tighter on the week, amid a good flow of deals. Explain that!

The synthetic indices played out in a narrow range, small up or down on a daily basis with Main closing the week at 54.8bp (-0.3bp, Friday) and X-Over at 274.7bp (-0.4bp).

As for this week, industrial America steps up with over 200 companies due to report quarterly earnings. The ECB is up midweek and may ensure that credit primary is busier on Monday, Tuesday and perhaps Wednesday, before shutting down for the week. The central bank is expected to leave everything unchanged. Also into the final two sessions, we’ve got US GDP, durable goods orders and PCE as well as UK GDP numbers for Q1. In the Eurozone, it’s services and manufacturing PMIs.

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.