22nd October 2017

Record breakers

iTraxx Main

55.0bp, -1.3bp

iTraxx X-Over

242.5bp, -3.9bp

10 Yr Bund

0.45%, +5bp

iBoxx Corp IG

B+102.3bp, -1.5bp

iBoxx Corp HY

B+263.8bp, -3.5bp

10 Yr US T-Bond

2.38%, +6bp

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″]

Momentum upbeat into the final weeks of 2017…

A week is a long time… in the markets. We ended last week with an increased positive tone. The latest EU summit left us with a feeling that the Brexit negotiations will possibly continue in a more constructive and less combative manner. And before that, we had the news that the US Senate had passed budget legislation to allow for tax reform that President Trump has pushed for as one his major economic goals.

German producer prices rose by more than expected in September, the UK’s budget account deficit for September was the lowest for 10 years, while the prospect of a November rate rise dimmed a little following dovish remarks from one of the MPC members. So we go into the final week of the month feeling that risk assets prices will hold up at these quite lofty levels and have the clear potential to move higher through to the end of the year at least.

The global economy is buzzing along fine in general, and finally we’re seeing some sustained consistency in the recovery dynamic in the Eurozone. There is still some uncertainty about policy rates because of odd data flows which point to potentially needing more caution on the timing of the forthcoming rate hikes, especially in the UK. The ECB’s QE taper news/policy will be with us soon too, but in the meantime we’re all thinking in terms of Goldilocks as far as the economy is concerned.

Admittedly, we received a bit of a jolt in rate markets with yields sharply higher as we closed out the final session of last week. Ten year Bunds were left to yield 0.45% (+5bp), Gilts in the same maturity 1.32% (+4bp) and US Treasuries 2.38% (+6bp). That was to be expected as the bid for safe haven assets faded, but equities had a good session. We can worry about the PBOC chief’s ‘Minsky moment’ comment as much as we like, but until we get some sort of collapse in that debt saturated market, investors will continue to chase risk assets higher.

Results at the end of last week from companies reporting their third quarter earnings were disappointing, though. After a good start to the earnings season led mainly by the banks, we had GE and P&G missing, while in Europe Ericsson and Daimler disappointing. They were not enough to derail the push higher for stocks, buoyed more on hopes of that tax reform deal in the US. The US powered higher on Friday into fresh record highs for the Dow and S&P.

We are quite comfortable still for a solid end to the year for risk assets. That might mean rate markets give up some more (yields edge higher) and fixed income returns drop a little from here. But we remain of the view that credit spreads which are already in record territory for the high yielding markets are likely to get there for the investment grade markets as well (see below) – and will serve to offset some of the rise in underlying yields.

Primary still not buzzing

Tasty deal: Nestlé chipped in with €2bn overall

Nestlé piped up with a three tranche deal for €2bn taking the monthly total to €11bn and the YTD total to €221bn for IG non-financial issuance. The Swiss borrower managed to take between 13 – 17bp off the initial guidance for the various tranches, but the deal was fairly unremarkable given they funded between midswaps+8bp and +32bp for the various maturities (6 to 20-years).

With nothing in high yield or financials on Friday, what can we expect this week? The ECB throws a spanner in the works as some will want to wait until after the ECB meeting is over. With the earnings season about to pick up in Europe as well, we can safely assume this week will be fairly muted in terms of IG-rated corporates looking to get funding away.

Morgan Stanley was the only senior financials borrower last week (€2.75bn, two tranches) while only four borrowers for €4.3bn populated the IG non-financial market. We will probably see what gets done in high yield and the Wind Tre’s mega offering might be the main focus in this market as we head for a record-breaking year for issuance in euro-denominated high yield issuance.

Spreads grind tighter, deeper into record territory

The Street found it necessary – amid growing confidence for risk assets – to mark the spread markets better and we saw a relatively big squeeze in spreads. Flows were light as we might expect. For the iTraxx synthetic indices we had Main end the week at 55.0bp (-1.3bp in the session) and X-Over dropped to 3.9bp to 242.5bp.

The Markit iBoxx IG cash index closed at its lowest level this year of B+102.3bp (-1.5bp) and this index is now just 8bp away from the record lows. The index is 4.5bp tighter this month and 32bp tighter this year so far. The sterling market has been holding up extremely well, too – spreads at G+132bp for the index, which is at around the lows for the year. No Brexit/rate/concerns here – just a need for yield, above the risk free rate.

Records were broken elsewhere, with the corporate hybrid index spread at a record low of B+227bp (-4bp in the session) and the index yield closing at 2.23%. The higher yielding CoCo market was tighter as well, some 8bp on the index which took it to B+411bp and just 10bp off the year’s record low while the index yield dropped to a new record low of 3.80%.

There will be no surprise that the high yield market saw spreads at new record lows as well, the cash index at B+263.8bp (-3.5bp) which is a remarkable 150bp tighter in 2017 (or 36% for the index). With US stocks higher, they will drag European ones in the same direction and that means the very closely correlated higher-yielding asset classes will continue to see spreads go tighter. And that even if rate markets see yields rise little from these levels.

So, for this week we have much more on the earnings front having us look forward to almost 200 of the S&P500 group of companies reporting, taking in the likes of Ford, Boeing and McDonald’s. In Europe, it’s ECB time which means all eyes on Thursday’s announcements/press conference. Obviously, there will be no changes in policy rates (refinancing and deposit rates to stay at 0% and -0.4%, respectively) but the markets will be expecting some details on tapering of QE-related asset purchases – likely to be reduced from €60bn, from January (to €30bn?).

Finally, with those solid gains and record-breaking closes in the Dow and S&P, we ought to be on the front foot as we open for business this week. Madrid assuming direct control over Catalonia ought not to act as brake for higher equities and tighter spread markets.

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.