27th March 2017

Looking forward to Q2

FTSE 100
7,337, -4
12,064, +25
S&P 500
2,344, -2
iTraxx Main
75bp, -0.5bp
iTraxx X-Over Index
292bp, -1.5bp
10 Yr Bund
0.40%, -2bp
iBoxx Corp IG
B+129.8bp, unch 
iBoxx Corp HY Index
B+365.4bp, -1bp
10 Yr US T-Bond
2.42%, unchanged

Looking on the bright side of life

We’re into the final week of the quarter and we have much to look forward to. The recent macro data suggests that the global economy is on a sure footing amid some very good data streams on Friday just gone. Equities are holding at around recent high levels, with any retracement being put down to a healthy pullback preventing any major irrational exuberance. Whilst they’re overvalued as judged by most measures, there is little sign that they might drop precipitously.

In fixed income, the US Treasury market is rangebound (10-year yields in a 2.30 – 2.60% area), while there is a similar situation occurring in Europe with Bund yields looked in a 0.30 – 0.50% range.

Slightly further afield, recovery in OATs is dependent on the prevailing French election rated news flow (yields back below 1%), and 10-year Gilts are holding around the 1.20% yield. More recently, there hasn’t even been a hint that we might break out of these trading ranges.

And certainty for corporate bonds

Friday saw a €350m deal for HP Pelzer

The corporate bond market is doing very well, too. We have a super month thus far on the primary front – including easily absorbing an €8bn offering from Volkswagen, while Novartis‘ dual-tranche €1.85bn issue on Friday took the monthly IG non-financial supply total to €27.7bn with a week’s worth of activity still to go. They took 10-13bp off the initial guidance on final pricing. Spreads have started to gain some traction too. We’ve seen IG paper on a clear tightening trend and have the ECB plugging away offering support with around €1.8bn of weekly interest (with over €70bn accumulated in the last 10 months).

There is a scarcity of bonds in secondary, but we have a cash-rich investor base looking to get their fill through an ultra competitive primary market. There is little reason to see how things will change this week. We can expect an effusive primary market given the size of the pipeline both IG and HY.

The high yield bond market has had a super opening quarter, returning over 1% (index spreads 50bp tighter) and issuance approaching €15bn YTD. More of the latter and we will be approaching record levels of supply for any full year. HP Pelzer added €350m on Friday with NH Hotels taking a €115m tap issue, to take the monthly total to €2.5bn.

It might only be a grind tighter in IG (5bp tighter in index YTD), but it is a welcome trend which is being established given that this market languished in a tight +/-2bp range for most of January and February. The Markit iBoxx index now resides at B+129.8bp and closes the week below the 130bp level or the first time this year. Spreads were unchanged on Friday in a lacklustre session, and edged 0.5bp lower in the week overall. For the year to date, they’re now 5bp tighter – as measured by the broad Markit iBoxx index measure.

Sterling moves have been similar with the index level of G+151bp representing just 2bp of tightening this year so far. The Bank of England has lifted over £8bn of IG non-financial corporate debt since late September, and we would probably have to think in terms of the market having been much worse had they not been present. For now, the volatility afflicting the sterling currency and Gilts has failed to impact credit spreads – probably because the BoE has succeeded in continuing it. Returns are up at over 1%.

For the euro-denominated high yield bond market, we’re at B+365.4bp. That’s 5bp off the 2017 lows, 50bp tighter from where we opened the year and returns exceed 1%. This market has done fantastically well.

Credit investors’ strategies for Q2?

Looking ahead to Q2

The lesson from the last nine months is that the market is in the mood to take potential event-risk in its stride. We brushed aside concerns around Brexit, the Trump presidency isn’t causing the markets much angst, the Dutch elections threatened but didn’t deliver any major blows and we will position for a likely Macron win in the French elections. That’s what the establishment wants.

It means that we stay as we are. Long credit beta. There will be some election-related volatility through April and early May, but we must be thinking that “they will” gang up to prevent Le Pen from succeeding. The volatility will be seen in the equity and rates markets and while spreads might weaken into any of it, there will not be much opportunity to benefit as liquidity will be too scarce.

For credit positioning, that means duration probably slightly longer than index and a positioning bias clearly towards lower rated credit risk. Within that, we could argue financials should be gaining in prominence after years of being underweighted due to systemic and regulatory event risk.

…and for the record

We closed out last week amid calmer climes. The uncertainty around the healthcare vote in the US prevented there being a material move anywhere. US Treasury yields in the 10-year maturity closed unchanged at 2.42% with the 10-year Bund yield a touch lower at 0.40%, OATs outperforming to 0.99% (-5bp) and Gilts unchanged at 1.20%.

We think that this week ought to see risk assets on the up as we close out the month. We will have to get through the next bit of Trump’s legislation – the Wall – while in the UK, Article 50 will be triggered on Wednesday. Other than that, we’re quiet on macro, so the path is clear for a flurry of primary issuance to get the attention.

Have a good day.

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.