1st March 2018

Chapter 3: Tea leaves getting harder to read

MARKET CLOSE:
iTraxx Main

53.4bp, +1bp

iTraxx X-Over

267.9bp, +3.4bp

10 Yr Bund

0.65%, -1bp

iBoxx Corp IG

B+91.3bp, +1.8bp

iBoxx Corp HY

B+311bp, +5bp

10 Yr US T-Bond

2.81%, -6bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

It doesn’t need to be so difficult…

We turned the page into Chapter 3, and the early reading is that the tea leaves are telling us it’s same old, same old. There’s no obvious improvement in the big picture which would come from reduced equity market jitters, but at least we hold out for expectations of a better month for the primary corporate bond market. It’s early days, and while we have much hope that the omens can be constructive through March, the opening session was hard risk-off following the overnight, month-end losses in US stocks.

US equity markets – and where they might be heading near and medium term, have a habit of dictating the broader tone. Nevertheless, until now, there’s been just moderate levels activity/movement (weakness) in IG credit/spreads through much of the previous equity volatility allowing the asset class to outperform in February.

More immediately, we have those Italian elections at the weekend to look forward to (or not), and some will be positioning for a sell-off in Italian risk assets should eurosceptic parties win power. Coalition politics will most likely prevail in some make-up, and that might prevent a clear hard shakeout in policy. Our own view his that we are going to see only the most moderate widening in Italian (sovereign and corporate) CDS levels – with some contagion into other peripherals no doubt, if investors look to hedge against the possibility of some political event risk. At the moment, 5-year Italian sovereign CDS is at around 100bp (mid) and unchanged to even a touch better offered (lower) in the last week!

There will be no blow-out in Italian/peripheral cash spreads – and if there is it will be an opportunity while moderate weakness will just be a defensive Street mark with no follow-through, offered-side liquidity. We have been here many times before through these crisis-ravaged years and usually always found a way through the mist, even if not always the best solution is reached.

So, in cash, we do believe that any weakness will be limited and not necessarily predicated on any meaningful flows. Lessons have been learned – anyone reducing cash positions (in any industrial/geographic sector) will always find rebuilding that position a costly exercise. Liquidity is no longer the corporate bond market investors’ friend.

Away from Italian elections, we did see a flicker of light for a busier primary market. There were several IG non-financial deals, we had Orpea (unrated, implied high yield), a couple in senior financials, while the REIT and insurance sectors were active – again. IG non-financial corporate issuance were graced with Prologis and RCI Banque (categorised as a non-financial) representing a sort of decent start to proceedings for the month, where we hope for a €30bn+ month for issuance following a very weak dynamic in the opening couple of months of the year.


Safety First policy

Duration got a solid bid, although some of it was faded as the session progressed. The economic data from the US had a mixed feel to it. Ford and GM reported February auto sales down 6.9% year on year as higher market rates necessitated higher loan costs, while higher-than-expected personal income rises of 0.4% in January were offset by a moderation in spending (core PCE at 0.3% month on month and 1.5% year on year). The ISM manufacturing PMI index rose to 60.8 in February from 59.1 in January and the highest level since 2004.

Government bond yields declined by some margin earlier in the session in Europe before they edged higher into our close. In the US, steel tariffs dictated the ebb and flow. We were left with the 10-year benchmark Treasuries yielding 2.81% (-6bp), after the equivalent Bund closed to yield 0.65% (-1bp, low intraday yield of 0.63%) and 10-year Gilt yield was left at 1.47% (-3bp, low 1.45%). The Gilt was probably more supported ahead of the crucial speech on Friday from Prime Minister May on the latest stance of the UK government on the Brexit debate. Elsewhere, the Italian elections were no barrier to BTPs, the market there (as well as in the periphery) better bid and the 10-year BTP yielding 2.04% (-2bp).

Into the close of business to end February, the credit markets in 2018 had lost up to 0.3% in IG and HY (total returns), with sterling corporate bond losses at 1.7% (all Markit iBoxx index). However, equities in Europe were worse. The €Stoxx50 was off 2% in the period to end February, the Dax 3.7%, the FTSE returned -6% while US markets were up by between 1.3 – 1.5% (Dow and S&P). US market were 6% higher before the infamous correction!

The Fed’s Powell was still giving his testimony and stocks gyrated to his words – trying to stay in the black in the US early on, but failing to maintain it as he introduced the possibility of a fourth rate hike this year. They had already taken another tumble in Europe (the Dax particularly having a bad time of it, off 2%), meaning these equity numbers YTD are going to look even worse. That was all brushed aside though and US stocks were off by over 1.3%, as at the time of writing, after the US commerce department recommended imposing steel import tariffs of at least 24% and aluminium ones of 7.7%, from next week.

Corporate bond fund outflows? Nope. And rotation from credit or even rates (returns year to end February of -0.25%) to equity? Few are going to be chasing capital appreciation strategies yet.


Primary credit active

Prologis’ €300m deal was bettered by RCI Banque on Thursday

The IG non-financial deals took in Prologis for €300m in a 10-year maturity green bond priced at midswaps+78bp (-17bp versus the initial guidance) with books at €1.25bn. This deal was followed by RCI Banque‘s dual tranche offering which took in a long 3-year fixed portion for €750m at midswaps+23bp (-17bp versus IPT) and a 7-year €550m floater priced at Euribor+58bp (-7bp versus IPT). Combined book for the deal were at €2.5bn. In all, the day delivered €1.6bn of deals.

The REIT/property borrower was Finland’s Kojamo Oyj which issued €500m in a 7-year maturity at midswaps+100bp, and high yield implied-rated French nursing home operator Orpea took €400m also in a 7-year maturity at midswaps+200bp. The deals were priced 10-15bp inside the opening guidance.

In financials, CBA issued a €500m floater in a 5-year at Euribor+25bp and Nationwide Building Society lifted €1bn in an 8NC7 deal at midswaps+85bp. US insurance group Chubb INA issued €1.8bn in a dual tranche offering split equally between 10-year and 20-year maturities.

As for the secondary market, little activity was the order of the day, but the market was a touch better offered. Including index changes over month-end, the iBoxx levels closed at B+91.3bp (+1.8bp) – and the highest level since early January. Overall, we would think that IG credit is still holding up very well given the more difficult equity markets. There might be some moderate pressure on subordinated Italian bank debt, but we’re holding well in the contingent convertible market, the index edged 3bp wider in Thursday’s session, highlighting if nothing else, the reduced level of market activity. The sterling corporate bond market closed unchanged.

For high yield, just moderate weakness. the index edged 5bp higher to B+311bp. That might look a little worse for wear after Friday’s close!

The synthetic indices were under only moderate pressure given the weakness greater in stocks, and so the cost of protection rose. iTraxx Main was a basis point higher at 53.4bp and at the close, X-Over was 3.4bp higher at 267.9bp. After that weak stock market close in the US, we’re heading for a difficult day Friday….

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.