28th April 2017

Spreading on the style

FTSE 100
7,237, -52
12,444, -29
S&P 500
2,389, +1
iTraxx Main
67bp, unchanged
iTraxx X-Over Index
268.3bp, -1bp
10 Yr Bund
0.29%, -4bp
iBoxx Corp IG
B+123.3bp, +-xbp 
iBoxx Corp HY Index
B+350.6bp, +2bp
10 Yr US T-Bond
2.29%, -3bp

No happy ending for primary

With a session to go before we close out the month – and one which is unlikely going to sully performance – it’s been a good April for spread product. Albeit a late showing, the ratchet tighter has finally been most welcomed by investors.

The high yield market takes much of the glory with cash index spreads some 65bp tighter year to date, but the investment grade market has also, finally – and with much relief – managed to squeeze out the performance we so long anticipated and expected. That index is 22bp so far in 2017, on a combination of relief at the French election and the almost complete lack of issuance this month; The latter delivering the worst April for issuance in IG non-financials ever. Next month’s activity ought to correct the imbalance between supply and demand.

That spread markets continue to elicit super support from investors and continued inflows into corporate bond funds at these levels is quite remarkable. The asset class has now (we believe) become a core one to sit alongside major investments hitherto confined largely to rate and equity markets. Fears (strangely enough) that higher growth will see materially higher rates and weaker corporate bond performance have been unfounded – and our market remains as strong as it has done versus any point since the financial crisis began. We don’t see any evidence of rotation from credit to equities. Some of this might change in due course, but a wholesale rampant rushed exit seems unlikely. 

With the ECB monetary policy committee meeting, it was always going to be a light session from an activity perspective – and that is just what we got. Primary was again limited, with SSA issuers generally hogging the limelight as corporate borrowers chose once more to stay sidelined, ending a generally shocking month of deals from them.

There were a couple of HY deals. We’re scratching around looking for concrete reasons as to why this was so – and don’t buy into the easy earnings blackout period as being the main one. There is no economic crisis, either, or a major risk-off period from a borrowers’ perspective given that we are all aware that strong demand dynamics remain in place.

No inflation, so no change from the ECB

ECB: No change needed

The ECB kept it all unchanged as expected, and there was little chance of them ruffling any feathers (being less accommodative) ahead of the second round of the French election debate. That meant that the deposit rate was left at -0.4% and the monthly asset purchase programme unchanged at €60bn.

According to Mario Draghi, the recovery is becoming increasingly solid, but that the bank remains vigilant to the downside risks, that inflation remains subdued and of course, further policy accommodation possible if needed. Something there, then, for everyone. But the key takeaway for us is that they are going to continue reducing the easier policy stance only gradually, allowing the markets to evolve smoothly as they do.

So there is no need for credit market participants to feel nervous about any immediate impact on the sector from less policy accommodation. So we do not look for a pop higher in market yields which means that the 10-year Bund ought to be anchored in its 0.20 – 0.50%. That also means that the demand for a higher yielding ‘safe as houses’ product like corporate bonds remains ‘as is’. Corporate bond markets live to fight another day. Technicals (from demand) and fundamentals (from improving growth dynamics) are seemingly becoming more entrenched as supportive dynamics for the euro-denominated corporate bond market.

More HY than IG, for the first time

We’re into the final session of the month and there is little reason to believe that we’re going to get change form primary into it. Yesterday’s session saw two more HY borrowers in the form of Senvion (€400m) and Travelex (€360m) which left us with a €6bn month – and that is excellent! We’re on course for a record year given that we’re up at €23bn year to date already.

And for the first time ever, we have seen the non-financial high yield market deliver more issuance than the equivalent investment grade one (stuck at €5.6bn). That is an amazing feat. The year-to-date IG issuance is now at €93bn.

Elsewhere in primary, Procter & Gamble issued in sterling in a dual tranche for a combined £750m and Martlett Homes took £400m, while Austria’s Wiener Staedtische issued a subordinated €250m. We wouldn’t be surprised if there was a high yield deal or two in the market to close out the month.

Post-election euphoria ends

It looked as if risk asset pricing was heading for the moon on Monday, but we’ve levelled off quite quickly and have started to give a little back. Equities closed out the session in Europe up to 0.5% lower (FTSE a little more), while the US markets were reacting to some disappointment around there Trump administrations tax plans.

In government bond markets, we saw a slightly better bid emerge to leave the 10-year yield on the likes of Bunds (0.29%, -4bp) and OATs (0.82%, -2bp) lower while Gilts also rose (in price) to yield 1.06% for the same maturity. Treasury yields dropped a touch too, to 2.29% (-3bp).

In credit, the ECB’s policy stance is a net supportive factor for the rest of the year, but there was material news around the Bank of England’s corporate bond programme. Here, the bank announced that it had completed it’s £10bn of IG non-financial bond purchases – and we’re soon going to find out how much of an impact they might have had on secondary valuations. That will take a few weeks to emerge. Spreads were a touch better bid, the index at G+149.5bp (-0.15bp)!

As for the euro-denominated corporate debt markets, we also stalled after a super week so far with the market just a touch wider for choice. The Markit iBoxx IG corporate index closed at B+123.35bp (+0.3bp – noise). That’s 21bp of tightening this year so far for this index. And that was followed by 2bp of weakness in the HY index as high yield market succumbed to the general tone of consolidation seen everywhere – the index left at B+350.6bp (which is still 65bp tighter this year so far). Wrapping up, the iTraxx indices edged a touch tighter (surprise) with Main at 67bp and X-Over at 268.3bp (-1bp).

Have a good day and long weekend. Back on Tuesday.

For the latest on corporate bonds from financial news sources, click here.

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.