2nd February 2017

The show has only just begun

FTSE 100
7,108, +9
11.660, +124
S&P 500
2,280, +1
iTraxx Main
73.6bp, +0.1bp
iTraxx X-Over Index
302bp, +1bp
10 Yr Bund
0.47%, +3bp
iBoxx Corp IG
B+133.6bp, -0.5bp 
iBoxx Corp HY Index
B+373.75bp, -7bp
10 Yr US T-Bond
2.48%, +3bp

Just sit back and watch…

The opening day of the month offered very little in terms of activity, although it was probably no coincidence that it was also FOMC day. The US dominated the scene in that sense, but we had a raft of data from Europe which was mostly upbeat. The politicians around the world are jockeying for position – the Saudi’s oil minister welcoming the Trump Presidency with a promise to invest more in the US oil industry, while the EU and Mexico were hurrying along a trade deal (amazing what the EU can try to agree quickly when needs must).

Trump has hit the ground running and he has hit it hard. The White House’s new occupant didn’t quite dominate the headlines yesterday as he has done over the past couple of weeks but the markets are reacting still. With the macro data being very good (see below), yields are trying to head higher – but there is a sense of nervousness around the “what next” question. That means there is no straight line higher for bond yields – and that includes in the Eurozone.

It’s all one big happy family.

Nevertheless, we’re still fairly constructive for credit. The returns profile might not be as enticing as, say, for equities around the potential for a sustained upward momentum in growth (driving corporate profits and higher dividends). However, with concerns aplenty around geopolitics, there are going to be periods of significant volatility for that asset class. That ought to play into the hands of the corporate credit world, with investors of all kinds content to sit out another year of low returns.

That is certainly the dynamic which is with us now amid high levels of sidelined cash looking to get invested.

Macro feels good

Manufacturing data across Europe pointed to a seemingly sustainable upswing in activity after yet another month of good numbers across the board – except from Greece, which particularly disappointed. Even the UK recorded a stellar performance, although there were some severe inflationary pressures (on input prices) which will have a telling impact elsewhere eventually.

Credit Mutuel Arkea: €500m Deal

In the US, the markets spent the afternoon cock-a-hoop into some massive job additions in January according to the ADP private sector survey. That might have implications for Friday’s non-farm payrolls while the more interesting number might be what wage increases look like. That was later followed by manufacturing ISM for January easily beating expectations with the prices paid component the highest for almost six years.

The markets reacted, true to form. Equities shot higher in Europe (more mixed in the US), government bond yields did too (but everywhere), cash credit moved a little better and primary was effectively closed, with the only deals of note coming from Land Securities (two tranches for a combined £700m) and Credit Mutuel Arkea (€500m, 12-year Tier 2).

High beta credit still in the ascendancy

Looking at some of the sub-indices, it is quite clear where the performance this year so far has come from.

Investors are taking on risk and are seemingly not deterred by the potential for event-risk which may come from the banking sector. The Italian banking sector immediately comes to mind. The highest beta product of the banking sector is the outperformer. That is, AT1/CoCo sub-index iBoxx spreads are 40bp tighter this year, and the index yield is down at 5.87% – or 20bp lower. This index returns +1.6% so far this year.

By contrast, the non-financial corporate hybrid sector has also had a better time of it – but not as good. Yields for the sub-index just 6bp lower this year at 3.34%, while returns are at a very decent +0.7% (similar to the HY market).

As for yesterday’s session, an effective blank in primary and better equities lent a hand to the cash corporate market and spreads inched tighter. The Markit iBoxx IG index closed just 0.5bp tighter. In HY, we had a much better session, in terms of valuations anyway. The index was down at B+373.75bp (-7bp) and is just 3bp off its lows for this year – but it is 40bp lower this year so far.

Credit protection underperformed, ending wider for choice (better bid) with Main at 73.6bp and X-Over at 302bp.

The Fed stayed unchanged, the markets did little after the announcement and we can only hope for a busier session from primary today ahead of a quieter one again tomorrow as we await the non-farm payrolls report.

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.