2nd May 2018

Sell in May? No way

iTraxx Main

54.8bp, -0.5bp

iTraxx X-Over

271.2bp, -2.5bp

10 Yr Bund

0.58%, +2bp

iBoxx Corp IG

B+104.4bp, +0.8bp

iBoxx Corp HY

B+322bp, unchanged

10 Yr US T-Bond

2.96%, -1bp

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″]

It’s back to business…

May Day, over. No S.O.S. We resumed business after the early week break and it was a better session than we might have anticipated. German stocks certainly got the wind in their sails and jumped higher by over 1%, doing their best to try to get back flat year-to-date. They’ve been down 9% already this year and have barely spent a handful of sessions in the black. And that’s been the story thus far for equities in most jurisdictions.

Not for credit. We’ve had spreads a little weaker in IG, a little more in HY and higher beta markets, while total returns for those non-benchmarked investors have been anchored in 0 – 0.5% range.

Admittedly, that’s not terribly exciting, but that’s how we ought to like or should prefer as the macro environment and outlook sits in this inflexion period looking to break higher in growth terms (but failing to do so) and hoping inflation can pick up closer to target (still struggling to do so). For euro-denominated corporate credit, we seem to still be enjoying that sweet spot where growth, inflation and default rates remain supportive and should help sustain a constructive tone towards the asset class.

Our frustration, nevertheless, is primary. It’s been a bugbear of ours of late because it’s been a shocker of a market for IG non-financials this year. We only just crept over the €70bn line for the year so far following Tuesday’s dual tranche deal from Rolls-Royce – but we are down 25% year-on-year. After seeing an average of €250bn+ of deals in each of the previous 5 years, we’re going to be looking at €200-220bn at the current run rate. We’re most likely going to need a couple of €35bn-like months of supply to boost us back towards the aforementioned average levels. That’s looking unlikely.

The US economy looks to be going along at a steady pace. Manufacturing might have slowed a touch, but it is still expanding at a decent clip. The dollar continues to rally hard and oil prices are holding $70 per barrel plus. The Treasury market is selling off again although yields are not necessarily ripping higher at the moment, whilst three rate hikes are being priced in for this year.

The Eurozone, on the other hand, is feeling a little warmer under the collar. GDP growth in Q1 slowed to 0.4% versus 0.7% in Q4 2017 and few are blaming seasonal factors as there was a clear slowdown across all sectors. The industrial arena has slowed since the beginning of the year as April’s PMI dropped to a 13-month low. Inflation is not likely going to be ripping higher. If there is any relief, it is the postponement of those tariff measures by the US until June. Overall, there is unlikely going to spur a pick up in investment, as confidence will remain shaky.

The rate markets are little more difficult to judge. If US yields go materially higher, then they will drag yields everywhere else higher too – most likely. ‘Most likely’ because that is what we have observed in the past. This time, though, the Eurozone’s growth looks to be slowing while the UK appears to be in the doldrums. Gilt yields have been falling as a May rate hike is unlikely to occur now in our view – while we don’t expect anything this year from the BoE.

Back in the Eurozone, Draghi and the ECB have their work cut out in trying to figure out just where the economy is heading and how they might express the next taper move on QE purchases to the market, expected by us all come the July meeting.

So macro is a mixed bag from a growth perspective and we’re seeing a ‘push me, pull you’ like effect as a result as far as bond yields are concerned. Equities seem to be playing out in a similar fashion between the markets with currency movements adding a little extra confusion to the daily movements between the respective markets. That said, April was a good recovery month for all markets, as fleshed out below.

April’s returns bring back hope

A quick recap; Equity and rate markets both rallied in April, helping to bring back some respectability to this year’s performance. Having been down by well over 6% in the opening quarter, a recovery of 4.2% in the Dax saw that total return index down by 2.3% in the opening four months. The S&P and Dow were down by 0.9% and 2.2% respectively, with the S&P making 1% in April. Of the main equity indices, though, the FTSE was top of the pile making 6.5% in April, recovering losses of over 8% in Q1 to a loss of 2.3% in the opening third of the year.

Eurozone sovereigns held relatively firm, with the Markit iBoxx Eurozone sovereign index recording total returns of 1%, versus +1.3% in the opening quarter. That was a good performance given the rally in April in European equities and we normally would have expected a much worse performance from rate markets. There has been a higher correlation of late between equities and rates (both rally or sell-off together), as the two market sectors react with different interpretations to the current macro data.

In credit, IG was barely moved with returns improving 0.1% to -0.4% for the year to end April. The high yield market did better, helped by the spread recovery and relative stability in the rate markets turning a loss of 0.5% in Q1 to a positive return of 0.1%.

The firmer tone in the Gilt market through April, as the data showed a slowing in the UK economy with the likelihood of a rate hike in May off the table, helped offset corporate spread weakness and returns were unchanged at -1.5% in the opening four months.

Market off to a decent start

German equities took the eye with 190 points added (1.5%) in the session, but we did have a session which was broadly positive for European risk markets. The data corroborated the prevailing view of a slowdown in growth through Q1 and April across Europe and we’re of the view – as mentioned above – that there will be no rate hike in May in the UK, while the ECB must be thinking in terms of perhaps leaving the €30bn of monthly purchases just as they are through year-end – and not taper the purchases in September as most believe they will.

So while equities were generally better bid in the Eurozone, government bonds were playing out in more mixed fashion. The US led the way, with the 10-year Treasury back up at a yield of 2.99% (+2bp) intraday having moved 3bp higher in the previous session before a better bid pushed yields to unchanged at 2.97%, pre-FOMC. The equivalent maturity Bund yield rose to 0.58% (+2bp). A massive rebound in construction activity in April in the UK pushed Gilt yields higher, the 10-year up at 1.45% (+5bp).

Unibail-Rodamco issued a combined €3bn

In corporate credit primary, Rolls-Royce issued €1.1bn across two tranches and was the sole non-financial borrower in the day. They issued €550m in a 6-year maturity at midswaps+45bp and the same amount in a 10-year priced at midswaps+70bp with both tranches’ final pricing 15bp inside the opening pricing gambit.

Unibail-Rodamco was very busy with a 4-tranche effort for a combined €3bn as it continued to raise funds for the near $16bn purchase of Australian shopping mall group, Westfield. The combined book was at €5bn for the €800m 3-year, €800m long 7-year, €900m long 12-year and €500m 20-year tranches. The group had previously (mid-April) issued €2bn in a dual tranche hybrid issue. And we had CPI Property Services lift €550m in a sub-investment grade rated hybrid issue in a PNC5.5 structure priced at 4.625%.

The synthetic credit markets were better offered and we closed with Main down at 54.8bp (-0.5bp) with X-over at 271.2bp (-2.5bp). In the secondary cash market, there was very little doing. The Markit iBoxx IG index was marked wider at B+104.4bp (+0.8bp) but that was more to do with index rebalancing over month end than anything else. The sterling corporate market (which was open on Tuesday) closed slightly better bid, at G+143.1bp (-0.5bp). As for high yield, the cash index was unchanged at B+322bp.

And finally, the FOMC delivered what the markets had long anticipated: Very little. the next meeting comes in mid-June and as inflation in the US gets near to the Fed’s target level, a rate hike is pencilled in for that June 12-13 meeting. US equities rose on the news and there was a slightly better bid for Treasuries (10-year yield at 2.96%, -1bp).

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.