29th May 2017

Resilient, and then some

iTraxx Main


iTraxx X-Over


10 Yr Bund


iBoxx Corp IG

B-+118.8bp, +0.6bp

iBoxx Corp HY

B-+321.4bp, +1.2bp

10 Yr US T-Bond


FTSE 100 (live) [stock_ticker symbols=”INDEXFTSE:UKX”  static=”1″ nolink=”1″] DAX (live) [stock_ticker symbols=”INDEXDB:DAX”  static=”1″ nolink=”1″] S&P 500 (live) [stock_ticker symbols=”INDEXSP:.INX”  static=”1″ nolink=”1″]

Bring it on…

With just a couple of sessions left before we close out the month, we’re into the final month for any material business before the holiday season starts in earnest.  It’s therefore worth reflecting a little on the year so far and the next month’s positioning.

The US stock markets have zoomed past their record pre-Trump tantrum record highs to set new ones. European stocks have also had a very good time of it. Government bonds, having initially sold off and sitting on negative returns, have been holding ranges for the best part of a couple of months. Credit has performed better than we might have expected in this opening period and is already showing the kind of performance we might have expected for the full year.

To get there, investors have brushed aside all manner of potential banana skins over the past 10 months that came in the form of Brexit, Trump’s presidential triumph, Putin’s ongoing meddling in global politics and the North Korean situation. The first round of the French elections caused some angst, but we’re through them all and breaking records in the process.

There’s little reason why we shouldn’t be able to squeeze out some more performance. The earnings season is over, the next election which matters doesn’t come until September (Germany) although the French parliamentary ones in June might subject the markets to a little volatility. We should therefore be heading for a summer of ‘content’ and be raring to go come September.

Investment grade credit made some rapid headway into the first round of the French elections, but the tightening has stalled since. The high yield market reacted the same way, but actually continues to tighten in moves which correlate well with equity markets. And their close correlation is reaping great dividends for HY investors who sit on returns YTD exceeding 3.5% (+0.75% in May) with the cash index a stunning 100bp tighter in 2017 and at record low levels.

Sterling markets are also having a good time of it, with returns as we close out May already at 4% for the year so far (+1.2% in May). The BoE completed its supposed 18 month, £10bn QE corporate bond operations in just 7 months, but credit spreads continue to tighten and returns boosted by the firmness in the bid for the underlying (Gilts), where UK growth dynamics continue to disappoint.

Primary can still sparkle

After a couple of sessions where we drew a blank in primary into the back-end of last week, we’re looking for a brighter period this week. With the mini-holiday period now over, and the markets still very receptive and keen to get deals away, we are looking for a decent amount of issuance.

Senior financial issuance currently stands at around €17bn, high yield non-financial corporates have stumped up a measly €2bn while IG corporates have offered €31bn of paper to investors. Admittedly, six borrowers are responsible for the €21bn of the latter total, but the overall market dynamic is unchanged.

That is, we have huge investor demand for corporate bonds (still), pricing typically tightened by 10-25bp depending on the maturity, and on books which are typically 3x or more oversubscribed. The higher the yield/spread, the greater the demand and tightening potential. There’s been no let up in this technically supportive function for the market for the best part of 18 months. And with underlying yields remaining low, spread product remains attractive for fixed income investors. It’s like Christmas every day for corporate borrowers.

We would also suggest that the corporate bond market has become less of a “let’s invest in a safe-haven-like fixed income product offering more yield than government bonds” to a more structurally supported market in the fixed income space.

That’s why, while equities are zooming higher, the corporate bond market continues to attract inflows (albeit they’re at lower levels than we might be used to), and barely any outflows as some multi-asset managers might seek to alter their portfolio bias (towards equities).

Record-breaking merry month of May

The US stock indices once again closed at record highs for the S&P and Nasdaq indices – and that after a limited session on Friday with the indices rising less than a point and 5 points, respectively.

In Europe, the FTSE closed at a record high too – but off its intraday record high. The Eurozone markets underperformed and were mostly in the red. The 10-year Gilt yield dropped to 1.00% on fears that the better growth picture seen after the Brexit result has now faded and a rate hike (despite higher inflation numbers) isn’t coming anytime soon.

The 10-year Bund flirted with 0.40% at times last week, but government bonds ended the week better bid and the yield on that maturity closed at 0.33%. It was a similar story in the US, and yields on the 10-year Treasury ended at 2.25%, and the lower end of its recent trading range.

In credit, the iTraxx indices closed slightly better/unchanged with Main at 61.5bp and X-Over at 250bp. That didn’t really follow-through into the cash market. Although it was closed for business in primary – and may as well have been in secondary, spreads were marked a touch wider.

That left the IG Markit iBoxx at 118.8bp (+0.6bp) and the HY index at 321.4bp (1.2bp). They’re both around 5-6bp off their 2017 lows – or record lows as far as the HY index is concerned. The week ahead might be about squaring positions and readying for June as well as the end of the first half of 2017, but there’s little reason not to expect credit markets to hold firm and hopefully gain some continued positive momentum for a while yet.

The rest of the week has PCE and personal income data, while the UK general election debate will gather more steam ahead of the June 8 polling day. We wrap up with US non-farms on Friday.

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.