14th April 2019

2016 (or maybe 2017?) all over again

iTraxx Main

56.9bp, -1.5bp

iTraxx X-Over

245.6bp, -3.6bp

🇩🇪 10 Yr Bund

0.06%, +6bp

iBoxx Corp IG

B+130.4bp, -2bp

iBoxx Corp HY

B+400bp, -9bp

🇺🇸 10 Yr US T-Bond

2.55%, +5bp

🇬🇧 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″]

Credit market lapping it up…

There are still a couple of weeks in which to get some business done either side of the long Easter weekend break. And chances are that credit Primary ought to be flying, equities will probably edge higher, fuelled by the potential for further eventual policy easing – while discounting a potentially poorer earnings season overall (bank results got us off to a great start), with credit spreads going tighter as market rates stay anchored.

We should position for that, with multi-asset players adding high beta credit into portfolios, while credit investors retain their bias (or increase) towards a higher beta portfolio positioning.

Brexit might have been seen as a catalyst for some major changes, but that’s a can kicked way down the road now, and will no longer weigh on the market like it once might have done. We still have the US/China trade talks and, to some extent, the earning season (as mentioned). But while we might be geared up for the latter to effectively disappoint (wrong-footed at the start with solid JPMorgan/Wells Q1 reports), the trade talks will likely just drag on. On policy, we believe that the ECB is going to loosen soon, while the minutes released last week suggest the Fed has set us up for a potential rate cut as well.

If anything, last week’s ECB press conference and Fed minutes will play into the hands of the yield hogs. Yield is all that will matter now. Market rates are stuck or going lower and while the macro data might have been more mixed of late, the signs are that we are heading for an extended period of weakness, or low levels of growth. Central banks will remain ready, as they try their best to try and talk up the market/outlook and act only in desperation, perhaps.

While they wait and see, credit investors will be taking down whatever comes in Primary. Last week saw a reduction in the pace of deal flow but did include some juicier offerings. They came from the likes of Telecom Italia and Ineos in the high yield market, with Banco BPM offering €300m in an AT1 deal with an 8.75% coupon for the Caa1/B (Moody’s/DBRS) rated issue. Risky for sure, but the demand is there and they got it away off an order book of €600m.

Interestingly, and it didn’t always used to be the case, Primary sterling corporate offerings are also seeing books massively oversubscribed. Only last week, for example, Yorkshire Water’s £350m, 22-year maturity deal priced at G+125bp (-20bp versus IPT) and had a book up at £1.65bn. So the demand for paper is evident across the board and spread and return performance also seen in all corporate markets.

IG spreads are 40bp tighter year to date (iBoxx) and the pace of the tightening at the moment is unrelenting (and seemingly accelerating) with 9bp of it this month so far (just 5bp last month). Some squeeze, and it is surpassing all expectations! In the AT1 market, we have had supply (see above) but the demand for yield is trumping everything. The iBoxx CoCo index is 175bp tighter year to date and returns are up at an incredible 7.5%!

And the high yield market, supposedly meeting its Waterloo this year as the macro outlook deteriorates, is actually going great guns, too. Supply has generally disappointed with a fair proportion of the deal flow made up of fallen angels and/or decent IG rated companies issuing corporate hybrid debt. The demand for those has mainly resided with IG investors. So we have had a squeeze. The cash index is 125bp tighter this year with 40bp of that coming in the first half of April already. Returns have jumped and now deliver 6.3% year to date.

Admittedly, we’re barely a third of the way into the year and the going is good, but we shouldn’t be getting ahead of ourselves. At least we can brush the Brexit situation aside until later into the third quarter. However, in 2016, just as we prepared for central bank action and later fed off the ECB’s QE activity, IG credit returned 5% and HY 11%. In 2017, the momentum might have faded but we still managed total returns of 2% and 6%, respectively. The current trajectory of the moves in the market have us closer to 2016 than 2017.

Primary poised?

That performance for secondary credit is coming just as Primary might have slowed a little in these opening couple of weeks of April and a cash-rich, junked up investor base has been flummoxed by it. Therefore it is likely bidding up the illiquid secondary market. Hence the squeeze.

Last week saw less issuance (as mentioned earlier) with IG delivering just four deals for €2.1bn, leaving the monthly total for issuance at €10bn. There’s still €10bn+ in the market (we believe) and we might just see a busy few days ahead of the long Easter weekend. At €94bn year to date, we’re ahead of last year’s €69bn – although in 2018, we had the lowest annual total for issuance since 2012.

The high yield deal flow also saw four borrowers for €2.7bn and the monthly total rises to €5.6bn as a result, which doesn’t compare too favourably at the moment with the €11.4bn issued in the whole of April last year. We’re lagging year-to-date too, with just €16bn offered versus just over €30bn for the Jan – April period in 2018.

Early US earnings catch the worm

We closed last week with Chinese import/export data and they threw up a mixed bag, with the data affected and distorted likely by the February Lunar year holiday slowdown. Exports were up in March by almost 15% (dollar terms) after a huge decline in February (over 20%), while imports declined for the fourth successive month by 7.6% annually. The markets will likely read less into the numbers because of the distortive effects of the February holiday, but few will be anticipating any material rebound in the coming months as the weakness in global growth persists.

The US earnings season is underway

And then there was the US earnings season starting with Wells Fargo and JPMorgan out with Q1 numbers. The reports are going to be a dominant feature for the markets for the next 2-3 weeks, with the suggestion being that we’re going to see the lowest levels of profitability for several years, and with the first decline in overall quarterly earning since 2016 (US S&P).

Well, we were sold a dummy! JPMorgan was out with record quarterly earnings as the consumer bank came up trumps for them and offset weaker earnings from trading, lending and higher credit costs. Nevertheless, the declining rate environment is likely going to eat into earnings in Q2/3. As for Wells, the much-troubled bank also comfortably beat expectations.

That all helped to give a boost to risk assets as we closed out the week, pushing the US S&P index to around 1.2% short of its all-time record high. European bourses were already in better shape during the session and managed to close out up to 0.5% higher (Dax coming out on top).

There was a big sell-off in rates. The 10-year Bund yield rose to 0.06% (+6bp) and the equivalent benchmark Treasury yield backed-up to 2.55% (+5bp), while receding Brexit fears pushed the 10-year Gilt yield to 1.21% (+6bp).

In credit, the good luck story continues. The synthetic world saw the iTraxx indices push lower again, closing 1.5bp tighter for Main at 56.9bp and at 245.6bp for X-Over (-3.5bp), which is 4.6bp and 8.2bp better in the week, respectively.

As for cash, we closed with another squeeze in last week’s final session, leaving the iBoxx cash index for IG corporate risk at B+130.4bp (-2bp) and that’s the tightest level since October 2018. At B+400bp, the high yield index tightened by 9bp, that being the third largest daily move this year.

As for this week, we have the US earnings season continuing and it will probably fight it out with the raft of macro data also due. The likes of Goldman Sachs, BofA J&J, IBM and PepsiCo report Q1 earnings while retail sales, industrial production and trade data from the US are also due.

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.