20th March 2019

The Fed signs off on 2019!

iTraxx Main


iTraxx X-Over


🇩🇪 10 Yr Bund

0.08%, -1bp

iBoxx Corp IG

B+137.9bp, +0.5bp

iBoxx Corp HY

B+431bp, +2.8bp

🇺🇸 10 Yr US T-Bond

2.59%, -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″]

Thank you, America…

The Fed took centre stage and suggested that they will be on hold for the whole of 2019 which elicited a euphoric market response amid much relief. In euro credit, €27bn in each of January and February and we have followed up with €22bn so far in March, with little sign of any real let up in the pace of supply from IG-rated non-financial markets.

The demand for the deals is as impressive as it is consistent as well as being the best it has been in recent memory. That includes when the ECB was busy vacuuming up the market in its own corporate QE purchase period. The most recent offering from Schaeffler AG saw demand up in excess of €18bn for the 3-tranche €2.2bn of deals, and pricing was rammed tighter between the initial price talk and the final level by 35bp – 45bp.

The focus of the demand hasn’t just been here, because we’ve had a plethora of regulatory capital offerings while the senior non-preferred sector is beginning to perk up some too. Secondary risk is in good shape, albeit amidst little activity but broad market confidence is holding the market together.

Some of the very recent data (Zew survey, Eurozone wage growth) seems to have emboldened equity markets in so much as suggesting that we may have reached a floor as far as the decline in the region’s growth rate is concerned. It’s at least something that markets can work with. If it turns out to be the case, then the high yield market ought to find greater levels of support and spreads ought to tighten more for the lack of fear of a sharply rising default rate, for example.

Nevertheless, the BMW profit warning in the session put paid to any hopes that we might continue the good run of late. It also served as a good reminder that the current macro weakness is going to wreak some havoc on this year’s corporate earnings streams. The German auto giant said profits in 2019 would be well below those of 2018 which themselves were almost 10% lower than the previous year. Higher investment costs (new technologies i.e. electric cars) as well as the ongoing costs associated with CO2 compliance are the culprits, although weaker macro and political event risk have also been a factor.

In addition, news that a US jury found that Bayer’s Roundup weedkiller causes cancer saw its shares drop 10%. The weedkiller was acquired as part of the deal for which it paid $63bn for Monsanto in 2018. The Dax dropped by 1.6%.

Spread squeeze goes on

Credit’s session was dominated by the iTraxx index roll as we headed into the Series 31 from the Series 30 contract. The small matter of the FOMC curtailed any meaningful activity. Still, there was the CNH issue in the market, a bunch of SSA deals and Barclays in dollars with the latest AT1 offering.

In secondary, it isn’t necessarily perky amid a swathe of interest, but we are squeezing. It has helped that equities generally have been firmer. Money, though, has found its way back into the corporate bond market and portfolios need their fill. Lower rates for longer and a more cautious Federal Reserve and ECB have contributed much as well.

With the tea leaves well-aligned, confidence is high. Primary is driving the market at the moment. As mentioned above, the demand for deals is excellent across the whole corporate bond market although we are seeing a strong bias for deals with a higher beta flavour about them. Yield is the name of the game.

In secondary, the IG market has seen spreads tighten by as much as 35bp this year (iBoxx index), absent the manipulative influence which came with the ECB’s QE programme in the June 2016 – end 2018 period. That’s a tremendous performance and has been bettered by high beta sectors such as the high yield market and the AT1 market. There’s little reason to believe it can’t continue so far as macro weakness can be contained and we avoid any material systemic events.

The Fed signs off on 2019

The day was full of speculation around Brexit. Would the PM quit on June 30 if her request for an extension was granted by the EU? Would the EU grant an extension beyond May 23rd so as to prevent the UK from contesting the European elections? In the event, the EU seems like an extension might be granted if the PM got her deal through Parliament next week. The French were digging their heels in and suggesting that they would not support any extension. And so it went on.

The markets reacted to it. Sterling was in the firing line and came under some considerable pressure while Gilts were better bid which pushed the yield on the 10-year lower to 1.15% (-3bp). The FTSE closed 0.45% lower supported by that weaker sterling.

In rates elsewhere, the 10-year Bund yield was back to yield 0.08% (-1bp) while the US Treasury in the same maturity was yielding 2.54% (-8bp) ahead of the Fed – see below.

Credit index was all about the new contract roll, with the S31 iTraxx Main contract at 65.8bp and the X-Over index at 263bp at the close, both higher than the roll adjustments. It will take a couple of days before we get a better idea as to how credit protection costs might be reacting to the vagaries of the broader market as participants look to roll and adjust into the new contracts.

The deal in the session for the corporate sector came from CNH Industrial, which printed an increased €600m, 8-year maturity transaction priced at midswaps+155bp allowing for a 20bp tightening in the pricing versus the initial guidance. The orderbooks came in at €2.2bn.

In the cash market, we had some respite from the deal flow with just that single euro-denominated offering. Secondary, though, was a little weaker amid the more difficult session seen in equities and naturally, after such a good run, we had some resistance to the tightening trend.

That all left the Markit iBoxx cash IG index moderately weaker at B+137.9bp (+0.5bp), while the AT1 market was wider by more on those weaker equities, the index at B+577bp (+18bp). Of course, the high yield market was always going to back up too, but mid little flow and volumes were left at B+431bp (+2.8bp).

As for the Fed, it’s risk-on! The US markets were cock-a-hoop on news that the Fed signalled no further rates hikes this year. Adding to that, the monthly reduction in Treasury holding would decline to $15bn from May before ending the reduction in September. Treasury markets rallied and the 10-year yield immediately dropped 8bp to 2.54%. US markets were lower by up to 0.5% before the communique was released but then jumped to 0.3% higher, as at the time of writing.

We will follow suit today in Europe with a bid likely across equity and fixed income markets.

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.