15th January 2020

🗞️ Shades of 2019

iTraxx Main

43.6bp, unchanged

iTraxx X-Over

209.5bp, -0.4bp

🇩🇪 10 Yr Bund

-0.21%, -3bp

iBoxx Corp IG

B+105.5bp, +0.4bp

iBoxx Corp HY

B+340bp, +2bp

🇺🇸 10 Yr US T-Bond

1.80%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

It’s almost laughable…

We’re into the second week of the new year and the barriers to a risk asset rally are being dismantled. US equities are in the ascendancy and, at this rate, the S&P500 index will be up at 3500 by quarter’s end. There are only around 200 points to go!

Even rate markets are playing ball with the day’s UK and US inflation/Eurozone industrial data showing enough (or not) to warrant a significant rates rally. Shades of 2019.

Admittedly, on the event risk side, we are in ‘relief-trade’ mode. The thawing in trade tensions between the US and China is the current driver of the rally – just as the phase one trade agreement was signed. Just a few days previous it was relief that the US and Iran had backed away from a more devastating confrontation. Macro is ticking over and all we need is a decent earnings season to see out a good quarter for markets. It would be some feat coming off the back of the 25%+ gains in stocks last year and 10%+ gains in higher beta credit sectors.

It was another busy session primary, but curiously, again light as far as IG non-financial issuance was concerned. Actually, we drew a blank. So after three sessions this week, only four borrowers have visited for just €2.05bn (€13.3bn year to date). The excitement has been elsewhere. Mainly, that is, in the sovereign space with Italy and Belgium adding to the raft of government bond deals and coming hot on the heels of Spain’s €10bn (record-breaking €50bn+ order book) deal on Tuesday.

In spread markets, of course it is early days, but the bid is as firm as it has ever been for higher yielding corporate risk. We suggested that the HY/IG compression trade will continue this year and we are seeing that emerge, where any equity volatility is having only a very limited impact on high beta spreads. The correlation here is usually quite high.

IG spreads are 2bp wider this year (iBoxx index, B+105bp) but the high yield index is 5bp tighter and we think it is looking to push on (at B+340bp). The real push has been in the AT1 market where even the several CoCo offerings this year have failed to dent the squeeze tighter in spreads. The index is 20bp tighter already this year.

Interestingly, the sterling corporate market is outperforming. We previously suggested that the FTSE would be the ‘go to’ market this year as it plays catch up with the rest (having underperformed in 2019 by some margin) post-Brexit. Now, the clamour is growing for an interest rate cut and that will make sterling credit look more attractive. The market is already 5bp tighter this year and rallying Gilts have pushed returns to +1.3%.

Primary still cutting it

The day’s action was in the sovereign space. Belgium issued €6bn in a long 10-year at midswaps-7bp with interest up at €27.5bn for the bonds. But they were well-trumped by Italy’s €7bn long 30-year deal priced at BTPs+6bp with books up at a fantastic €47bn.

In the corporate space, Commerzbank made what felt like a debut in sterling given its last visit was over a decade ago. The financial crisis hit the bank particularly hard. As well as issuing €750m in a 7-year non-preferred at midswaps+100bp (-20bp versus IPT), they took £400m in a 5-year SNP at Gilts+145bp. The other senior deal, in preferred format, came from RBI AG which issued €750m in a 5-year at midswaps+52bp (-13bp versus IPT).

In the Tier 2 market, the much troubled Monte Dei Paschi was busy with a €400m 10NC5 structure, priced to yield 8% and garnered interest of €925m. Real estate investment trust group CyrusOne issued €500m in a 7-year at midswaps+150bp, with books up at a massive €3.8bn allowing for 35bp to be culled from the initial talk.

Elsewhere, Clarion Housing printed £350m of a 15-year maturity sustainability issue at G+98bp (-17bp versus IPT) and CPI Property also took £350m of an 8-year green bond, at G+235bp (-25bp versus IPT) with books here up at an impressive £2.5bn. Finally, in sterling, Oxford University tapped its 2117 (old 100-year) issue for £250m at G+97bp (-13bp versus IPT).

Data suggests UK rate cuts coming

The UK was entertaining inflation data which showed that consumer prices rose by 1.3% in December (year on year) – but that was down from 1.5% in November and the lowest print in three years. As indicated earlier, market probability for a rate cut jumped to over 60% and should the data remain depressed over the coming weeks, we will probably see a cut by the end of the quarter.

The soft inflationary outlook was underpinned in the US, too, as December’s PPI came in at 0.1% versus the previous month as expectations were pitched at 0.2%. With little evidence of any price pressure (CPI was also subdued, reported on Tuesday), the Fed is on hold for the foreseeable future.

In Germany, GDP for 2019 dropped to just 0.6% – and to the lowest level since 2013 (1.5% in 2018). Other data in the day showed industrial production in the Eurozone at 0.2% in November (o.3$ expectations) while industrial production year on year to November declined by 1.5% (-1.1% consensus). Whether the Eurozone economy is close to – or is – bottoming out remains to be seen, but we’re not going to get any central bank action anytime soon.

As for the earnings season, strong loan growth helped BofA and as solid flows boosted BlackRock and they beat expectations. Target missed while Goldman missed again for the second successive quarter on the back of heavy litigation charges.

With all that, sterling edged lower while Gilts rallied taking the 10-year yield to 0.65% (-8bp) and the lowest level since September 2019. The equivalent maturity Bund was yielding -0.21% (-3bp) and Treasury yields also declined, left at 1.80% (-2bp).

European stocks closed in the red, but the declines in the day were minimal. The FTSE was up, but the story was again the US, where the S&P was closing in on 3,300, the Dow zipped through 29,000 and the Nasdaq likewise rose with all three setting fresh intraday record highs in the process. The indices were off those highs, as at the time of writing.

Credit protection was unchanged, leaving the iTraxx Main index at 43.6bp and X-Over at 209.5bp. In cash, IG did very little and closed just a touch wider leaving the iBoxx index at B+105.5bp (+0.4bp).  The AT1 market edged 4bp wider to B+376bp while in high yield, the index was at B+340bp at the close (+2bp). Sterling spreads closed unchanged.

Have a good day.

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.