2nd March 2017

Risk markets flying

FTSE 100
7,383, +119
12,067, 233
S&P 500
2,396, +33
iTraxx Main
71bp, -2bp
iTraxx X-Over Index
281bp, -11bp
10 Yr Bund
0.28%, +8bp
iBoxx Corp IG
B+135.5bp, -2bp 
iBoxx Corp HY Index
B+368bp, -9bp
10 Yr US T-Bond
2.46%, +10bp

The “ides” don’t have it

It’s March and few can resist the temptation that famous Shakespearean prose usually brings about. There was certainly little to worry about yesterday – the markets were flying. Admittedly, for some, it doesn’t feel great and there is some concern on valuations given that we’ve sailed through too many obstacles with little worry in these past six months, but that is no reason to take those riskier chips off the table.

Certainly, the huge rally in risk assets yesterday was not suggestive that portfolios are about to take a nosedive, and would have been a painful reminder to those who had got a little defensive. Timing. We’re likely in for a grind (admittedly not yesterday), the trajectory for growth being positive and equities flying, even from these heady levels – and looking to be going even higher.

And credit spreads are likely stable at worst, but should finally tighten versus the benchmark supported by the huge inflows currently parked up waiting for primary. Government bonds have thus far played out in a range – at the top end of it as we closed out January, and recovering to the lower bounds into February’s close. They gave a chunk back yesterday.

On those themes, Trump’s Congress testimony was measured – for him. There’s hope that we might see a little more of this side of him. And much state spending is coming to help bump up US economic growth. The Eurozone manufacturing industry is looking sprightly, German unemployment continues to decline and inflationary pressure are increasing as evidenced by the German regional/national surveys yesterday – as well as other data points over the past couple of months.

Despite the big moves in yesterday’s opening session of the month, we still believe few are shifting out of safe-havens and rotating into equities: the ultimate investment chasing economic prosperity and capital appreciation strategies. There are too many “what ifs” for that to be the case.

Trump remains the biggest potential event risk situation we face. The economy is looking good though as it drags itself off multi-year low growth rates, but could easily be derailed by Trump and/or elections coming up in the Netherlands and France. So it makes sense to keep some safe-haven chips on the table even if that means performance might feel a little less love.

In credit, money still comes in. Investors are playing it safe and sticking together to create the largest group huddle outside the primary market ticket office. Primary is where the action wants to be, and issuers feel as though they have been slow to come forward in order to get deals away at still very attractive and, in some cases, still historic low funding levels. We’re still purveyors of taking on some additional risk versus benchmark, which means slightly longer duration positioning and a portfolio beta exceeding 1.0. Close to home? No.

Primary markets churning deals

Air Liquide:€600m deal in a 10-year maturity

We opened the month’s account for non-financial IG issuance with deals from RCI Banque and Air Liquide. RCI Banque came in the form of a dual tranche transaction for €750m (3-year floater) and €650m in a 7-year deal, knocking 10-20bp off the initial guidance.

Air Liquide followed up with a €600m deal in a 10-year maturity costing midswaps+42bp, and some 18bp inside the opening level. So €2bn of supply opens up the month and we’re looking for close on €30bn before we close it out.

The opening quarter of any year is usually the busiest, and we think some of the backlog from deals which could have been issued in January and February might be issued this month. However, we caveat our exuberance with the potential for windows closing amid any volatility around polls and so forth around the upcoming elections.

On Tuesday we had £1.25bn issued in CoCo format from Barclays, while in yesterday’s session we had RBS follow with €1.5bn in a 6NC5 fixed to FRN HoldCo issue. Commerzbank and ASB Finance issued €750m between them in senior funding. In sterling, we had a couple of drive-throughs as Daimler tapped its 2020 deal for another £150m – while the high yield sector got a £250m 8NC3 deal from Avis to digest.

Chapter 3, 2017:  And it is risk-on

It was a day for records, with the FTSE, the FTSE250, the Dow (effortlessly past 21,000) and the S&P all posting new highs. Irrational exuberance or not, the US economy is on the up, with factory level activity at the highest level for many a year. The PCE inflation indicator rose to 1.9% (favoured Fed measure for inflation – target 2%) and gave the market enough of a reason to think that a rate hike is coming later this month. The DAX added almost 2% and was up well in excess of 12,000, while it was weak sterling (trading off a low-$1.23 handle) that boosted the attractiveness of UK stocks.

On the flip side, government bonds came under pressure to record some of their biggest losses (yield rises) for a while. In the Eurozone, initially there was perhaps a process of normalisation in the bond market, after news that Fillon will continue with his Presidential bid in France.

OATs were slightly better offered, but outperformed Bunds and the spread between them dropped to 63bp. The 10-year Bund yield rocketed to 0.28% (+8bp) while OATs rose to 0.91% (+2bp) and  the equivalent maturity Gilt was yielding 1.19% (+4bp). Treasury yields also took it on the chin, with the 2-year yield rising 6bp to 1.28% and the 10-year by 10bp to 2.46%.

The corporate market wasn’t in the mood to be left behind. The upbeat t0ne filtered through into tighter spreads especially as seen in the synthetic indices, with no doubt some CDS longs being closed out into the better tone. With equities in this mood, that was to be expected. iTraxx Main closed at 71bp (-2bp) and X-Over some xxbp lower at 281bp (-11bp) – the latter recording its best daily move for months.

In cash, index changes and all, we closed 2bp tighter with the Markit iBoxx index at B+135.5bp and one of the biggest daily moves this year. Finally! Returns dropped because the underlying had a poor session, but we can worry about that later in the month. The same trend happened with sterling credit risk, as the index moved to G+149.6bp (-1bp)  – and the first time we’ve broken G+150bp in exactly a month.

As for the high yield market, we saw zero on the new issue front but the massive rally in equities fed through into the high beta high yield corporate bond market, as one could expect. There was not a huge amount of flow and activity, but we managed to tighten quite hard.

As measured by the Markit iBoxx index, we closed at B+368bp – some 9bp lower, and the lowest level seen this year – and 12bp lower than our target for the full-year! Actually, we go back to mid-2014 for the spread on this index to be this low, while the index yield of 3.33% is the lowest ever.

The message for HY borrowers, is get those deals in and push out those refinancing dates some more. The going is fantastic.

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.