28th November 2017

The US equity bulls march on

iTraxx Main

49.0bp, -0.7bp

iTraxx X-Over

233.8bp, -4.3bp

10 Yr Bund

0.34%, unchanged

iBoxx Corp IG

B+98.8bp, -0.2bp

iBoxx Corp HY

B+137bp, unchanged

10 Yr US T-Bond

2.33%, unchanged

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″]

Momentum building…

The Bank of England’s banking sector “stress tests” went through with little altercation, with no remedial action needed. However, in a separate development, the BoE demanded that the UK banks put aside an additional £6bn in capital to guard against material macroeconomic risks after Brexit as it raised a special buffer to 1% from 0.5% (and could raise it again).

Extreme caution for sure, but these are ‘good times’ for the banks and if there is anything we have learned from the financial crisis, it is to build the buffers when most affordable to do so. Elsewhere, we had equally positive signs as Eurozone loan growth to businesses grew at their fastest rate since the crisis began, adding further to the view that the financial shackles are being loosened into increasing confidence across the region of a potentially sustainable economic recovery.

So we are now getting the basic building blocks in place as we look to create the foundations for a positive growth story for 2018. The rest will hopefully follow – decent levels of growth, higher inflation, and rising market rates in anticipation of a normalisation in policy rates as the central bank sees fit to withdraw the decade long stimulus and extreme accommodation. Baby steps though are needed, but a normal economic cycle sometime in 2020 and beyond must be the target.

Indeed, the OECD’s latest economic outlook published on Tuesday cautioned against an early rate rise – and expect it to come in 2020, while at the same time being optimistic on growth and inflation.

We would believe that any significant or otherwise rotation trade away from credit to equities is unlikely through 2018. Fresh cash will still find a home in a lower yielding corporate bond market in 2018, albeit it might come at reduced levels if the aforementioned economic eventually looks like being realised. Besides, there is a lock-in period for the vast majority of real money corporate bond funds, and so a mad dash for equities in some kind of strategic reappraisal is unlikely. We think that the corporate bond market will find itself in a positive situation for a good while yet. Where we expect spreads will continue to tighten, but returns possibly come under pressure should rates start to back-up through 2018, as most will quite correctly anticipate.

The weakness in spreads in early November was a reminder that we had tightened too much, too fast amid poor secondary market liquidity. Some of that more than likely came from the Street tightening up the market too aggressively as those US stocks (in particular) hit daily records, while also failing to provide any meaningful liquidity. The corporate bond market feels better now, the tightening more of a grind amid the lowest levels of secondary activity and devoid of any exuberance.

Primary window wide open

We were met with a number of deals from most sectors of the market. In IG non-financials it was Johnson Control International which issued an increased €750m deal with a 3-year maturity, some 22bp inside the initial guidance at midswaps+23bp. BMW was busy in dollars, issuing $300m in a Reg S, 4-year maturity at midswaps+50bp.

The high yield market opened the account for this week with a rare offering (it seems) from ArcelorMittal for €500m priced at midswaps+85bp for a long 5-year. the order book was close on €3bn and the final pricing reduced by 25bp versus the initial chatter. CEMEX was the other high yield rated borrower taking an increased €650m in a 7NC3 structure priced to yield 2.75% and 0.5% lower than the opening guidance gambit. Who ever said the high yield market was overheated? the two deals for a combined €1.15bn took the monthly supply level to €5,6bn and to over €67bn for the year to date.

Other deals came from property groups Klepierre (€500m, 15-year), Hearing Real Estate (€500m, 5-year) while Nestle took £500m from the sterling market in 3.5-year funding at Gilts+55bp. In financials, Talanx printed a €750m 30NC10 subordinated fixed to floating deal at midswaps+145bp (-20bp versus IPT) while Allianz issued €2bn across three tranches (3-year floater, 5.5-fixed and 10-year fixed). Finally, ING Groep took out €1bn in a senior bail-in issue in a long 10-year maturity at midswaps+57bp.

Bulled-up elsewhere

We had clear fresh record highs in US equities with the S&P and Dow both in good form, and even Bitcoin was cozying up to the $10,000 level. All of that might change as details on Trump’s tax change talks emerge, while US consumer confidence hit 17-year highs as both Black Friday and Cyber Monday were the biggest shopping days ever in the US. The US markets provided additional impetus for European equities to gain a little more and they ended up to 0.75% higher, with the FTSE outperforming with gains of over 1%.

Rate markets were also slightly better bid but that faded, leaving yields unchanged. The 10-year benchmark sector has the US Treasury yielding 2.33%, with Bunds and Gilts unchanged to yield 0.34% and 1.26% respectively.

The better tone made for lower credit protection costs and the synthetic indices responded by moving lower. iTraxx Main was 0.7bp lower at 49.0bp and X-Over was 4.3bp lower, left at 233.8bp – with both more than reversing the rise seen in Monday’s session.

The cash market saw IG spreads edge tighter, the grind leaving the market overall just 0.2bp tighter, with the Markit iBoxx index at 98.8bp. Small change, but we might get a better session on Wednesday as we trade the buoyant US equity market. The CoCo market closed completely unchanged. As for high yield, it was the same picture. No change. We’re not chasing it!

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.