27th June 2019

That’s a cracking first half

MARKET CLOSE:
iTraxx Main

53.7bp, -1.2bp

iTraxx X-Over

256.4bp, -7.5bp

🇩🇪 10 Yr Bund

-0.32%, -1bp

iBoxx Corp IG

B+125.3bp, unchanged

iBoxx Corp HY

B+423bp, -3bp

🇺🇸 10 Yr US T-Bond

2.00%, -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″]

Now sit back and enjoy the G20…

It got a little precarious through May, but we have recovered extremely well leaving us effectively to almost charge our way through a great first half of 2019. The reality check will come later. The markets have kind of fizzled out from an activity viewpoint this week reflecting both the super performance they have all had so far this year, but also the potential for a nasty surprise emerging from the G20 meeting this weekend.

Nevertheless, in credit, IG is up by around 5.5% (iBoxx index), HY credit returns have exceeded 7% and the CoCo market is close to delivering 10%. Even after some recent weakness, the total return Dax index has returned almost 16% and the S&P index is up by over 16%. IG spreads are 47bp tighter year to date, the CoCo index has tightened by 165bp and the HY market by 100bp.

The primary market is going great guns, too, and the high volume of deals has failed to have a negative impact on spread markets. That is, investors have had deep pockets and plenty of room to absorb the issuance that has come by. A massive €165bn has been issued from IG rated non-financials and it has come at a record run rate – with no ECB QE to compete with investors for the paper, as yet.

“So George, where did it all go wrong?” asked the hotel bellboy to George Best.

The record annual level of supply for the IG non-financial market came in 2016 (€272bn), when it was first mooted and later realised that the ECB QE programme would participate in the investment grade corporate bond market. Spreads crunched tighter, yields collapsed and corporates funded aplenty as investors scooped up the paper and were fed some excellent levels of performance.

More recently the expectation has grown that the ECB will enact a fresh QE programme and government bond prices have ratcheted higher, achieving fresh record low yield levels. With, for example, the Bund curve offering negative yields all the way out to 15-years and closing in on 20-years (just a handful of basis points to go), we have seen asset allocators and others divert greater levels of cash into the corporate bond market.

That money needs to be put to work. Cash is expensive.

Corporate funding costs are closing in on historically low levels, even if spreads still have a little way to go. The IG iBoxx index yield is at just 0.75%. If underlying yields are going lower from these levels – which we think they are – then, without doubt, that index yield is going to 0.50% or less, and take in a greater universe of borrowers being paid to get funded.


Primary quietens but super June

We close out the month with a couple of quieter session in primary, but we have had the best month for deals for a while. IG non-financial issuance is oat €37.7bn, the best June month since 2014 and the best month since May 2016. As mentioned earlier, the run rate for the month is at record levels.

€500m

€500m deal for Engie

During the session, the sole IG non-financial borrower was Engie, as it lifted €500m in a hybrid deal, the PNC6 offering priced to yield 1.70% which was 42.5bp inside the initial guidance. The French borrower had issued a dual-tranche senior deal for €1.5bn a couple of weeks ago.

We had a couple of senior deals. Intesa went for a combined dual tranche €2.25bn in preferred format priced at midswaps+125bp in a 5-year maturity and midswaps+165bp for a 10-year, while Bankinter issued €750m in a 7-year non-preferred structure at midswaps+95bp.

Those deals combined took the level of senior issuance for the month to €24.5bn and it is now also the best June month since 2014. At €98bn for the first 6 months, it is the best run rate for deals since 2010.


Yield Grab still the game in Q2

With just the one session to go, it appears as if we have more than recovered May’s lost performance and are going hang on to June’s excellent performance. We’ve set a marker for July but we would not expect too much for the month, nor for that matter August. Most likely, the best we could anticipate is a steady grind tighter in spreads amid low levels of both primary and secondary activity once we ‘up sticks’ come the end of the second week of July.

After the G20 this weekend, most likely the next big flashpoint will be the Fed’s end of July meeting (30/31) and the pressure will palpable for a rate cut. On the follow, we’re going to see pressure increase on the ECB to act as well and while we are not going to get a rate cut, QE is likely coming.

With investors aware of those possibilities, few are going to change strategies now. Sitting on those aforementioned gains won’t be enough either as spreads will grind tighter through the summer months – and possibly crunch tighter thereafter, especially if we get another CSPP. High beta risk will outperform again.

Trump: At it again

Anyway, we endured another weary session, with the market looking as if it just wanted to see out this side of the first half of the year. The G20 meeting also had much to do with it. Trump as ever was hurling the now obligatory salvo or two at member government trade regimes (India and Japan feeling his wrath this time).

So equities were generally flattish to a little higher and we are likely going to see much the same in Friday’s session. They barely looked like doing anything else.

Rates recovered, though, and were better bid – leaving the 10-year Bund yield back at -0.32% (-1bp) and, in our view, still on track for -0.50%. In the US, we had the 10-year Treasury yield at around 2.00% (-4bp) following a late rally, with the Gilt unchanged to yield 0.83%.

Credit indices recovered some previous weakness and iTraxx Main edged lower to 53.7bp (-1.2bp) with X-Over 7.5bp lower at 256.4bp.

In cash, with so little happening in primary (for a change), we had perhaps some focus on secondary – but no such luck, The market closed unchanged leaving the iBoxx index at B+125.3bp. There was nothing happening in the CoCo market (unchanged) and the high yield corporate market did the same, the index estate B+423bp (-3bp).

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.