28th May 2019

Sitting on the fence

iTraxx Main

69bp, +0.8bp

iTraxx X-Over

297.6bp, +3.8bp

🇩🇪 10 Yr Bund

-0.16%, -4bp

iBoxx Corp IG

B+142bp, +0.6bp

iBoxx Corp HY

B+447.3bp, +3bp

🇺🇸 10 Yr US T-Bond

2.27%, -6bp

🇬🇧 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″]

Excitement over for now…

Back to work but we struggled to brush off the cobwebs from the long weekend, not helped by Thursday’s Ascension holiday that will keep many in Europe out on Friday as well. Still, in this much shortened week, we had another last chance to get a little bit of business done before we close out the month, albeit rather prematurely. But, no.

The implications of the European elections were still being felt, Italian debt spent another session under pressure as Brussels prepared to hit the country with a fine for non-compliance of budget limits, while Eurozone lending growth showed an uneven picture across the region with weaker economies recording a contraction in lending in April.

Becoming a little more fearful, and/or preparing for the inevitable central bank action, government bonds got a bid and the 10-year Bund yield intraday fell to -0.16% (-4bp). At that level, it is now just 4bp off the record low.

The aforementioned European factors aside, the big threat at the moment clearly comes from the trade war between the US and China and it is looking like it just might spiral out of control (technology dispute now, etc) as each deadline comes, is passed, extended and additional tariffs lopped on/broadened.

Global trade has been impacted, investment has, spending too and much risk has come off the table especially in EM. The Chinese currency is feeling the devaluation pinch, so we are in dangerous territory knowing that the US administration is wary of potential ‘currency manipulation’ as a tool for boosting international trade.

As we keep reminding our readers, the current state of affairs on the macro front and developing geopolitical situations have played into the hands of the corporate bond market, much as they did in 2017. Not too cold, nor too hot and tinged with much uncertainty as to the medium-term outlook, the global economy threatens enough to keep growth levels subdued.

In credit, it’s been a more difficult one for performance but having bagged much in the January to April period it’s not been such a drama to let some go. Primary credit though has been in good shape and delivered so far just about on target (IG non-financial supply approaching €30bn), helping to absorb much of the heavier portfolio cash balances.

Credit, though, has dutifully plugged away. Primary, as suggested, has had a good month while absolute performance has been chipped away at as spreads have come under a bit more fire. The rally in the underlying has been helpful, serving to prop-up returns just as we think about assessing May’s total returns.

IG (iBoxx index) total returns year to date reside at 3.5% and the HY index has given us 5.6%. The longer duration sterling market has also returned 5.6% this year so far.

Yank(ee)s over here

We drew a plain vanilla euro-denominated corporate bond issuance blank on Tuesday – with just a covered bond on offer. That’s about to change, though.

Illinois Tool Works (ITW) should become the latest to squeeze out a three-tranche deal on Wednesday, thereby adding to the long list of such sized offerings this year. We dare expect other borrowers might also be in the market, but we are not anticipating a particularly busy session.

If the US borrower does pull the trigger on a deal, it will almost certainly take the IG non-financial monthly total above the €30bn mark (currently €28.55bn), while anything over €2.1bn would make May the biggest month of the year so far for deals.

Interestingly, Reverse-Yankee issuance in IG non-financials is by far the biggest geographic region supplier of borrowers this year – and by a massive margin. For any given year we average historically somewhere in the region of 12-18%.

However, for these opening five months of 2019, US borrowers have launched raids for an incredible €42.8bn of issuance (34.1% of the market), way in excess of French domiciled corporates issuing €25.6bn (20.4%). German corporates come third in the list with €9bn printed or 15.1% of the total market in 2019.

Subdued start to the week

It was a very lacklustre session. European equities did very little and barely broke out of trading flat through much of the day. Into the close, however, they ended mostly in negative territory (Dax -0.4%, €Stoxx50 -0.6%). The US markets closed up to 0.9% lower as investors there also returned from the Memorial Day long weekend break and fretted about the several issues facing them right now.

Rates, though, right now is where it is all happening. The 10-year yields on the main benchmarks all continued to drop. The gilt yield to 0.93% (-2.5bp), the Bund closed to yield 0.16% (-4bp) and in the US, the Treasury fell to below 2.30%, at 2.27% (-6bp), as at the time of writing. No fear here of any possible Chinese dumping of Treasuries.

We have long suggested that the dire straits that the Eurozone economy finds itself in and the tensions elsewhere make it extremely likely – almost inevitable – that we are going to test that -0.20% record low in the Bund yield. It might have had a leg up previously though the ECB’s QE bond buying program and so obviously manipulated but this time the direct help from the ECB is not so forthcoming.

That makes it all the more perilous in a sense because the markets are suggesting that the Eurozone’s recovery has stopped dead in its tracks and the ECB’s next involvement (not just the next TLTRO) is going to drive yields lower as the disinflationary/deflationary pull gathers steam. We refer readers to previous comments as to how this will benefit corporate bond investors.

Credit index had iTraxx Main up a touch at 69.0bp (+0.8bp) and X-Over 3.8bp higher at 297.6bp, in line with the move in equities.

Secondary cash was quiet and if anything, probably better offered for choice. Casino was downgraded to single-B with a negative outlook by S&P from BB- and later scraped its interim dividend to help stem the debt tide. We closed with the iBoxx IG index at B+142bp (+0.6bp) and it was the same for the high yield market, the index left at B+447bp (+3bp) at the close.

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.