21st March 2019

The Fed is your friend

iTraxx Main

66.7bp, +0.9bp

iTraxx X-Over

266.7bp, +3.7bp

🇩🇪 10 Yr Bund

0.04%, -4bp

iBoxx Corp IG

B+138.6bp, +0.8bp

iBoxx Corp HY

B+437bp, +6bp

🇺🇸 10 Yr US T-Bond

2.52%, -2bp

🇬🇧 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″]

Managing the decline in macro…

The Fed delivered a welcome dovish turn-up for the books and has likely provided the markets enough of an injection of a prolonged level of liquidity assistance that it will carry lumbering global economy through 2019. The good old peak to trough in the level of the economic cycle (be it measured by rates, inflation, growth) has compressed, courtesy of the devastating 2008 financial crisis and the policy response to it.

Only just out of the last downturn, and we’re into the next. Inflation has hardly sniffed at central bank policy targets while growth levels haven’t even reached half the post-war cycle peak before heading lower. And rates, well they’ve been stuck at the lowest of levels barely reacting to anything positive in macro, unconvinced that we’ve been anywhere near sustainable recovery.

Credit will find much support by this. Macro will be a worry but its decline and continued weakness is more akin a slow-burning fuse rather than that of a lemming-like cliff edge event. The central banks will manage the weakness and try to find a floor. One can argue forever and a day as to whether the firepower available will be effective – or as effective – as previously. For now, low rates for 2019 (or no change in the case of the Fed) means decent credit returns are likely assured for 2019.

The corporate bond market has developed a liking for ‘mini-macro’ crises. The evidence suggests so. It has returned negative annual performance on only a couple of occasions since 2008. Primary has busted issuance records on several occasions. The default rate has barely moved past 2.5% in any given year. The Fed has just given itself a reason to be loved again, not that it was needed given the stellar performance seen already this opening quarter.

The net result was a collapse in bond yields, uncertainty in equities – although we think they will not necessarily fall materially from here, and credit holding fire in primary but fairly robust in secondary. The stepped move lower in underlying bond yields will reset the funding round for corporates and we might just see the sector think hard again about refinancing – rather refinancing – maturing debt, now.

That will be akin to hoarding cash given the lack of immediacy to fund, invest and splurge the cash raised. We suggest that it might just be the case that issuance levels spike given that funding costs are so low. Certainly, it ought to be a boon for the high yield market which has spluttered at best this year amid fears previously of higher yields and/or economic weakness.

Big boost for markets

The government bond market was the clear big performer in the session. The 10-year Bund yield fell to just 0.04bp (-4bp) and is now in that sight of the pre-QE record low of -12.8bp. Equally, the 10-year Gilt yield collapsed to 1.06% (-10bp) but is still some way-off that 0.64% seen in 2016. Much of that was due to the developments on the Brexit front.

Mind, it went all bad news, the UK economy is defying gravity even as the BoE kept rates on hold on Brexit uncertainties. Retail sales unexpectedly jumped in February by 0.4% against expectations of a decline to -0.4%. In the US, the 10-year Treasury yield was unchanged at 2.54%. The 2s/10s curve was just 14bp.

European equities managed to close off their lows for the session, but still in the red with the Dax off 0.5%, for example. The FTSE was buoyed by the weaker sterling currency and managed to gain 0.9%. US markets were up by over 1% at the time of writing.

The credit market had a quieter session on the primary front. Nykredit Realkredit issued a short 5-year in a senior non-preferred deal for €600m at midswaps+92bp, while RBS issued £500m at G+230bp in an 8-year offering.

The furore to May’s overnight address to the UK nation and the shuffling on the Brexit front as the EU summit got underway saw some defensiveness in credit, as seen through the protection market. iTraxx Main Series 31 closed at 66.7bp (+0.9bp) while X-Over edged 3.7bp higher to 266.7bp.

In secondary cash, it was an opportunity to absorb the recent heavier level of deal flow and the market was quiet, impacted as usual by the poor level of liquidity leaving us with little doing on the flow/volume front. The market thus was effectively unchanged but the iBoxx IG cash index nevertheless edged wider a touch and was left at B+138.6bp (+0.8bp), with the weakness many in financials (low yields, flatter curves etc impacting profitability). Returns for this index rose though, to 2.8% year to date.

Finally, the high yield market was also a touch wider, the index top at B+437bp (+6bp).

And now, back to Brexit! 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.