22nd February 2018

The silence is deafening

iTraxx Main

54.0bp, +2.5bp

iTraxx X-Over

269.7bp, +5.2bp

10 Yr Bund

0.70%, -2bp

iBoxx Corp IG

B+88.5bp, +1bp

iBoxx Corp HY

B+303.8bp, +4.5bp

10 Yr US T-Bond

2.91%, -3bp

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″]

No reservations yet about credit markets…

The (as expected) positive tone regarding US growth and inflation from the FOMC minutes still managed to leave the markets in a quandary as they struggled again to reconcile the growth/inflation/rate hike conundrum.

US rates sold off overnight but did little to provoke the same reaction here, while the earlier 1%+ earlier gains in the US  turned into losses of up to 0.6% – and saw to it that we struggled to gain any positive momentum in Thursday’s session. Still, there’s no sign of the massive levels of volatility which we were greeted with in late January and the Vix volatility index sits a little more comfortably at around the 20% level (shot higher to 50% back then, versus an 11% average for 2017).

So, equities have again become a little more jittery – and rates want to go higher and are generally sitting at the top end of our (and most others’) expectations. Credit should manage to work its way through some sort of middle ground with returns left at low levels and spreads a little tighter come year-end as a result.

It’s a case of the same arguments being rehashed. But most likely every data point from now on is going to point to a sustained uptick in growth, a rise in inflation with policymakers clear in their expectations that it will eventually rise to the desired 2% level (in the US and the Eurozone) and that policy rates are going higher.

In the US, that means three hikes this year, in the Eurozone nothing – but policy accommodation is being withdrawn (lower QE as a start), while in the UK we have a possible 25bp hike coming in March. That slew of expectations should roll off everyone’s tongue.

We hinted above that credit plays out trading in some kind of middle ground with which the hoards of money which have gone into the corporate bond market since 2009 will have to contend with. Remember, this market has grown from around €700bn to over €2trn in under 10 years as money chased a stable, newly formed safe-haven fixed income asset class for guaranteed income and return of capital through some fairly difficult years.

Now we face a better and improving economic climate where the default rate will drop from already extremely – and historically in some cases – low levels. Unfortunately, higher inflation is going to promote a higher rate regime and some thinking prematurely, in our view, as to whether in the fixed income space it’s government bonds or credit.

And we think that choppier equities necessarily elicit a switch from preserving capital in fixed income to chasing growth investments. If we are in late cycle territory, then any rotation trade is off the table (credit to rates, or credit/rates to equity). So, relax, continue to play the market through primary, position more for higher beta risk (CoCos and low IG corporate risk and overweight financials versus non-financials).

But the returns (benchmark and total) are going to be lower than we might have been used to, where 0-2% will be good across IG and HY markets this year.

Investment grade corporates go walkabout

Primary continues to splutter. IG rated non-financial corporates remain absent. We’ve had Sixt and ALD issue – but they’re classed as financial services groups (for index purposes), and so non-financials have failed to offer a deal in IG since February 7, when McKesson issued €750m in a dual tranche offering. That’s a two-week absence from the corporate sector – and we have no crisis. If anything, the markets have been much less volatile than they were earlier in the month.

In Thursday’s session, we had a small high yield deal from UBM Development AG for €100m with the PNC5 hybrid deal priced at 5.5% – with no change in pricing from the initial guidance (unusually). This deal was followed by a Faurecia transaction, which saw the French group print €700m in a 7NC3 offering priced to yield 2.625%.

The other transaction in the session came from Italian insurance group UnipolSai Assicurazioni, which took €500m in a 10-year Tier 2 transaction priced at 3.875% (versus 4.25% IPT) – managing to lop 37.5bp from just a €1.4bn book.

Market recovers poise after FOMC minutes weakness

A lower reading in the German Ifo index (measures sentiment across German businesses) for February versus January tied in with other odd sentiment-related data points and was probably the driver for some moderate support for Eurozone rate markets.

In the UK, Q4 final GDP came in at 0.4% versus expectations of 0.5% after being revised down instead of up following some minor revisions, the detail seeing consumer services and business investment slowing in the quarter. And then we had the ECB minutes from the previous meeting – and concerns over the Trump administrations policy for pushing a weaker dollar.

The Bund was better bid all day, and closed out to yield 0.70% (-2bp) with the 10-year Gilt yield also lower, at 1.54% (-2bp), reflected in the equivalent Treasury yield which was also lower, by 3bp at 2.92%. Currency strength didn’t help European equities, as they closed in mixed fashion and only rallying late, as US stocks rose by up to 1%. The post-FOMC minutes wobble for US markets has been extremely short-lived.

In credit, the iTraxx indices have a mind of their own at the moment. Main closed 2.5bp higher at 54.0bp and X-Over rose by 5.2bp to 269.7bp failing to tighten into better US equities – even as European stocks recovered.

Nevertheless, the cash market moved wider a touch too, leaving the iBoxx index a basis point wider at B+88.5bp – which is a basis point this week, with Friday’s session to go. And so it comes as no surprise that high yield spreads were also wider – all again within the context of a quiet market with focus on the primary offerings. The HY Markit iBoxx cash index closed at B+303.8bp (+4.5bp) representing a leak wider in every session this week (+10bp so far).

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.