9th June 2019

Flaming June

iTraxx Main

62.8bp, -2.9bp

iTraxx X-Over

279.9bp, -10.7bp

🇩🇪 10 Yr Bund

-0.258%, -2.8bp

iBoxx Corp IG

B+140bp, -0.5bp

iBoxx Corp HY

B+460bp, -2bp

🇺🇸 10 Yr US T-Bond

2.08%, -4bp

🇬🇧 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 supposed to be ugly out there…

German GDP slashed, its industrial production falling off a cliff, exports in decline and the domestic economy beginning to slacken. US non-farms payrolls for May hugely disappointed, April’s additions were revised lower and average hourly earnings rose by less than expected.

A 2.0% yield on the 10-year in spitting distance and -0.30% on the 10-year Bund not impossible this week as negative yields in Bunds extend out to 15-years. Did someone say it was ugly out there?

It seems to be playing into the hands of… all markets. There is no suggestion that anyone is panicking. Far from it. The S&P index is less than 3% away from a record high.

In credit, of course, the headline 19bp move wider in IG spreads (iBoxx index) from this year’s tights recorded just a month ago is a little uncomfortable, but we are still 33bp tighter and total returns exceed 4%. The high yield market has given us over 5% (sterling IG too), and the CoCo market in excess of 6% so far this year. Macro is weak but not quite falling out of bed. Rate markets are telling us that the weakness will persist (and possibly weaken further) and are factoring in central bank action, soon. Going out on a limb, perhaps, but we think credit will see out H1 2019 holding onto those aforementioned performance gains, possibly even adding to them.

It would appear also that credit market investors are believing the same. There is still plenty of money to put to work and there is little point in paying-up so much to hold cash. The benchmark Bund curve is negative in yield out to 15-years and short term deposit rates deep in negative territory, hence the fixed income fraternity’s increased dalliance with the corporate bond market.

Single name event risk is a nuisance and in the main being treated as such. Few have been put off. Somewhere to park cash with positive income trumps most of the potential banana skins as investors scramble to get invested through primary in corporate bonds.

It’s effectively been a 10-year boon period for corporate treasury desks, and it shows no signs of letting up. The support that lower funding costs have offered the market has helped to sustain its lustre in the sense that the trickle-down effect has allowed the highest yielding of corporate borrowers to get cheap financing away.

It has pushed out the wall of funding which might have otherwise seen some sort of financing crisis, kept the default rate at levels unheard of given the dire macro growth environment and given investors confidence to stay invested. And add some more.

So few are concerned here because, judging by the macro data points on Friday, rate cuts are coming over the summer months. There’s a feed-in loopback to the corporate bond market in terms of demand for corporate debt and its performance. Cliff risk on macro is the concern, but it appears unlikely to occur as we ‘leak’ weaker instead.

Primary market feeling good

The window opens, promptly closes and reopens – allowing borrowers to jump through and get transactions away. Last week embodied the dynamic with €9.9bn of IG non-financial issuance from 15 issues off ten borrowers. Two of the deals were tripe tranche offerings coming from Vivendi and Publicis. For the year to date, we are up at €137.2bn which is easily ahead of last year’s €117bn (for the 6 months to end June) although the markets were much more volatile then.

We think that June could be a good month, with around €30bn issued with some of that making up for the slack following the poorer issuance in the final two weeks of May. The pipeline generally is very good and another €20bn of IG non-financial issuance could be absorbed quite easily.

So far, Bilfinger and Cabot Financial have been the only borrowers in the high yield market, lifting just €650m between them and taking the total so far for 2019 to €26.2bn, on target for somewhere around the €50bn for the full-year.

The deal flow in senior financials usually slows from now until year-end, but we have had a decent opening period with €76bn issued. €2.8bn has been printed this month.

Bundesbank and payrolls leave ECB/Fed behind the curve

The Bundesbank slashed 2019 GDP growth expectations to just 0.6% from 1.6% predicted back in December. That came as German industrial production fell sharply in April, by 1.9%, worse than expectations which were pitched at -0.4% and the worst drop in almost four years. In addition, exports reportedly declined by 3.7% in April month on month and imports also declined.

We expect Eurozone GDP to be revised lower in due course, whatever Draghi otherwise suggested in his revised higher forecasts for 2019 during last week’s ECB meeting.

The biggie, though, was the non-farm payroll report and the numbers reported a big miss as just 75,000 jobs were added in May against expectations of 185k, and April’s 263k payroll was revised down to 224k. Average hourly earnings increased by 0.2% against expectations of 0.3% while they dropped year on year to 3.1% from 3.2% previously. Only the unemployment rate was unchanged at 3.6%.

There ought to have been little surprise on those numbers given we had a taste of things to come from the weak ADP survey a couple of days before it. Duration rallied as we might have anticipated. The yield on the 10-year US Treasury dropped 6bp in the immediate aftermath of the report to 2.06% and the 2-year by 11bp to 1.77% with calls for a Fed rate cut reaching fever pitch.

The 18-19 June meeting just comes a little too early in that sense we think, but there will be enough data between now and the 30-31 July FOMC for them to more properly assess the need for action.

The main talking point in Europe was that Bund yield. The 10-year yield saw a fresh record intraday low of -0.262% (we suggested previously that -0.25% was last week’s business) as the inexorable grind towards -0.30% continues. Elsewhere, the 10-year OAT yield has never been in negative territory, but it is now just 8bp away from that feat.

Amazingly, as suggested earlier, the S&P is less than 3% away from a new record high and a couple of more bad data points could see it there. The US equity indices added over 1% on Friday with European equities not too far behind on the back of a very expectant market.

Primary credit only offered up a sole deal from BNZ which issued €750m of senior debt in a long 5-year at midswaps+58bp. The tea leaves are well-aligned, though, for a potentially heavy week as (funding) levels drop on tightening spreads and lower market yields, as the risk tone is upbeat leaving the receptivity to deals to be very good.

Secondary is trading into it, albeit a little more circumspect at the moment but we dare think the tightening will accelerate. The Street will tighten up the offered side of the ledger. For now, the iBoxx index closed at B+140bp (-0.5bp) and total returns at 4.2% year to date and the high yield index 2bp better at B+460bp (-4bp this month). In synthetics, iTraxx Main closed almost 3bp lower at 62.8bp and X-Over was 10.7bp lower at 279.9bp.

This week gets us off to a good start (albeit quiet with many jurisdictions across Europe closed for Whit Monday) with Mexico and the US announcing over the weekend that they had reached an agreement for immediate implementation for curbing illegal migration across their border. In a way, it might embolden Trump to pursue the ‘economic trade tariff’ route with even more vigour now that the policy appears vindicated.

Elsewhere, we have a raft of Chinese data for May including industrial production (which has been in contraction just about everywhere else), there’s US CPI and PPI and industrial production and the latter is due on Thursday for the Eurozone, too.

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.