12th January 2017

Sex, lies and videotape

FTSE 100
7,290, +15
11,646, +63
S&P 500
2,275, +6
iTraxx Main
70bp, +0.5bp
iTraxx X-Over Index
290bp, unchanged
10 Yr Bund
0.25%, -1bp
iBoxx Corp IG
B+135bp, unchanged 
iBoxx Corp HY Index
B+389bp, unchanged
10 Yr US T-Bond
2.37%, unchanged

Trump’s presidency promises entertainment…

The Linde Group: €1bn deal for the world’s largest industrial gas company

Still plenty in primary issuance markets but not as we know it. Either we couldn’t keep up the frenetic pace of the past few sessions or Trump holds all the power and the latest salacious rumours have the nerves jangling. Still, his speech later in the day might have served up enough of an excuse to stay sidelined for some borrowers, preferring to wait until it’s out of the way and the markets have settled into the next big event – his inauguration at the end of next week.

Nevertheless, Linde and Gas Natural Fenosa rocked-up for the IG non-financial market while Intesa San Paolo and Sumitomo pulled the trigger on senior deals. There was the usual smattering of covered bond deals, new mandates announced and several SSA transactions in the market. Macro was light with just some news around UK industrial production (up strongly) and the country’s trade deficit (worsening – as expected on the back of the currency’s weakness).

New deals continue to come with material tightening in the pricing dynamic following the excellent receptivity to deals. The lack of secondary performance isn’t an issue for investors at the moment while secondary valuations – spread tightening – has stalled pretty much in both IG and HY. The latter has outperformed with most of it coming in the opening few sessions of the year. We need another catalyst to get the secondary markets going again, and where the ECB’s heavy lifting is failing to promote tighter spread markets.

Other news flow in the session was fairly innocuous and so the markets had little to trade on. Secondary credit markets were quiet as we might have expected, but the deals were plenty big enough to give investors a decent fill of bonds and to be able to largely ignore the secondary markets. Linde printed €1bn at a very rich midswaps+22bp and 12bp inside initial guidance in a 5-year maturity deal. Gas Natural gave some more juice, issuing €1bn some 15bp inside opening guidance on a 2.5x subscribed book costing the borrower midswaps+85bp.

The total IG non-financial issuance for the month so far now stands at an impressive €12.8bn and is already twice the amount we had for the whole of a volatility, event risk ravaged January 2016. Intesa and Sumitomo took €1bn and €500m, respectively, for the senior market which has been quite active in these opening sessions of 2017 – and  €10.6bn is the big figure year-to-date.

Markets poised for a big move

Mark Carney:Bank of England Governor got it wrong about Brexit risks

The stock markets were in positive territory for much of the session, but they gave up to fade much of the gains – although there was little by way of interest to push them materially in either direction. The Trump news conference was the day’s big event – and we don’t believe there was much in it that was market-moving. He did shoot straight from the hip though.

Government bond markets were also holding steady and yields were barely changed in the session. The UK 10-year was yielding 1.34% (-2bp) with Carney back-tracking on his previous doomsday view of the Brexit vote, suggesting that Brexit was no longer the biggest risk to the UK’s financial stability! We could have told him that, even before the vote last June. The Bund yield edged a basis points lower, the 10-year at 0.25% with a similar pattern in movement observed for most other bond markets.

From a performance perspective, these opening sessions of the year make for an interesting read. Of course, it means little as yet, but the first month’s valuations – if positive, are always welcome. That’s going to be the case for the high yield market but likely not for the investment grade portfolios.

The Markit iBoxx IG corporate bond index closed unchanged again at B+135bp which has been about where we have been trading at for all of 2017 so far! The moderate weakness in rate markets since the beginning of the year has seen to it that returns in the opening 11 days of the year are at -0.3%. These are early days, and we still look for index spreads to head into the low B+120s for the iBoxx index (as a guide) by year-end and returns to deliver up to 2% of performance.

For HY, we’re actually in positive territory thus far. That has mainly come about by the 20bp or so of spread tightening since the opening session of the year, but also because this shorter duration product has benefited from more supportive front-end rate markets. HY returns currently come in at a positive 0.5% but there has been zero on the supply front to potentially sully the support for secondary, although some supply might not be a bad thing as it would garner further confidence in the asset class.

The iTraxx indices closed out with little excitement and unchanged/slightly better bid (wider), with Main at just under 70bp and X-Over at 290bp.

Have a good day. Back tomorrow.

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.