30th March 2017

The long goodbye

FTSE 100
7,374, +30
12,203, +54
S&P 500
2,361, +2
iTraxx Main
74.5bp, +1bp
iTraxx X-Over Index
292bp, +2.5bp
10 Yr Bund
0.34%, -4bp
iBoxx Corp IG
B+129.7bp, unchanged 
iBoxx Corp HY Index
B+369bp, +2bp
10 Yr US T-Bond
2.38%, -3bp

Let the show begin

The corporate bond markets took a breather midweek and with a couple of sessions to go before month/quarter end, why not? After all, we’ve absorbed over €30bn of non-financial IG corporate debt, almost €16bn of senior bank issuance and some €8bn of high yield bond supply. It has been a busy period for the markets, having to contend with Trump losing his healthcare reform bill and the consequences there might be for other executive actions.

Meanwhile, there was market apprehension (for some reason) around the triggering – finally – of Article 50, where the UK formally gets the ball rolling for a 2-year timetable for leaving the EU. Already we’re going to have any spurious market moves explained away by Brexit negotiations, just as we are seeing them now being down to the Trump-shuffle.

Big sell-offs won’t come as a result of Brexit negotiations, while Trump’s Presidency will likely have a more meaningful impact. After all, there are executive orders galore still to execute and we’re still waiting for his economic policy to be put in place. More immediately, it’s back to those French elections and increasingly looking like a shoot-out in the second round between Le Pen and Macron. We will probably get a little volatility into April and early May, but we have little doubt that the market will get through it fairly unscathed (unless it’s President Le Pen).

As the curtain was raised, the markets endured a fairly tentative start. As suggested above, corporate primary was lighter than we might have expected given what went on previously, equities played out small ups or downs and government bond markets were fairly flat until pushed on hopes of ‘one or two’ rate increases this year as the Fed’s dovish Charles Evans spoke. Still, Rosengren’s call for up to three further hikes was largely ignored. We wouldn’t expect too much to occur now for the rest of this week with the flurry of activity earlier in the early part of it likely the best of it. The end of the first quarter beckons and squaring up of positions needed, and we can all look forward to an exciting first half of the second one!

Higher yielders in the ascendancy

TenneT: €1bn green bond

It’s not often that higher yielding new corporate bond issues dominate a session, but they did yesterday with four issuers in the market. TenneT opened the bidding with a €1bn green bond in hybrid PNC7.1 format to yield 3% and some 37.5bp inside the opening guidance (crossover rated issue). In the HY market, we had Nexans in for €200m (2.75% yield) and Saipem take €500m offering a yield of 2.75%. However, it was Loxam who took the eye with a triple-header for €850m in a slightly increased deal.

The high yield bond market pipeline is considerable and we wouldn’t discount more deals getting done this week. The total for the month of high yield issuance is now €9.7bn. There are not many months where the euro-denominated corporate market delivers a €10bn, with just four such periods since the beginning of 2014. The last time this happened was September 2016 (when €12bn was issued). The sterling market wasn’t forgotten with Gazprom issuing £850m in a 7-year deal.

Rate markets on the up

Into the afternoon session, government bond markets were a stir as the Fed’s Evans suggested that he would vote for one or two further rate increases this year. Ten-year Gilt yield were down at 1.15% (-4bp), the equivalent maturity Bund yield dropped to 0.34% (-4bp) and OATs continued to rally with a drop in the yield to 0.93% (-4bp). US Treasury yields were lower too, with the 10-year yield at 2.39% (-2bp). Stock markets didn’t really move much on the news or in the session.

As for credit, the reduced level of issuance meant that there was some opportunity for investors to properly absorb the plethora of supply we’ve had of late, although IG market players would have given some attention to the TenneT hybrid. Secondary was calmness personified. IG corporate credit closed unchanged and, as measured by the iBoxx corporate index, was left at B+129.7bp. The rally in the underlying ensured returns are looking perky – more of that in a couple of days! Brexit was an issue in the bigger picture and while sterling might have weakened, Gilts rallied – and credit closed unchanged. The rally in Gilts helped returns rise markedly – more of that in a couple of days!

Finally, the high yield cash market saw some weakness as measured by the index, but the 2-odd basis points of movement was really noise. Furthermore, total return high yield fund investors will be consoled by the increased returns on the back of the rally in the government bond curve. Closing out, the synthetic indices closed wider, with Main at 74.5bp (+1bp) and X-Over at 292bp (+2.5bp) – it was just one of those days.

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.