18th February 2018

The walking dead

iTraxx Main

51.3bp, -1.6bp

iTraxx X-Over

261.7bp, -6.4bp

10 Yr Bund

0.71%, -5bp

iBoxx Corp IG

B+87.4bp, -0.3

iBoxx Corp HY

B+298bp, -3bp

10 Yr US T-Bond

2.87%, -2bp

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″]

Altering the cycle’s DNA…

We rescued some performance last week, and with just over a week of it left, we might just see out what could potentially have been a difficult February with the clock wound higher again. We’re not sure that lessons would have been learned from the correction we have traded through. After all, we’re ploughing money back into the market and it’s heading higher again.

Maybe that was it, that the market is not yet for turning and the recent panic was thrust up on us because of the fear of higher inflation and rates. History offers little clues as to how it might all play out. After all, never have we seen such levels of policy accommodation being needed to prop up the global markets. And combined with the extended period of lower rates that were the result of it, we might have altered the DNA of the economic cycle.

For instance, the ECB has rates at 0%, the Eurozone will grow this year at around 1.8%, credit spreads are at record tights and the default rate hasn’t nudged much higher than 3% for the best part of 10 years. And there is talk of an economic downturn in 2019. That’s like we’re in the throes of a Sisyphean challenge which sees us unable to break free from the stimulus we’ve become used to since 2008.

Therefore, even 2% Eurozone growth, 3% US and 3.6% global expansion are seen as a result. That is, we are in an extended period of needing to accept that growth will peak at lower levels than we had been used to, altering the nature of the cycle(s). That means, probably, lower risk taking – in the form of investment, M&A and capex. But higher in the form of investment flows – exacerbating asset bubbles because liquidity will stay in plentiful supply, and cheap.

It might not mean an end to boom-and-bust in macro, and a ‘crash, bang wallop’ in financial markets. It’s just that we might not see macro collapse from global growth levels of 6% to say 3% because we don’t get to 6%. But financial markets might see large drops before recovery like we have just been through because asset prices are chased extraordinarily high.

Nevertheless, the global financial system is stable and well-supported. That 10% correction we’ve been through might just be it for the year, and we rise steadily from here. We also likely become content with some kind of mediocrity struggling to break out of the zombification of the economic cycle.

Recovery in markets

We closed out last week with some very poor retail sales figures for January in the UK. Month-on-month sales rose by just 0.1% versus expectations of a 0.5% rise, and comes after a drop in sales in December by 1.5%. Gilts reacted by going better bid and the yield on the 10-year dropping to 1.58% (-7bp), while stocks got a boost on hopes that a UK rate hike is not necessarily imminent (with sterling also a touch weaker). The UK economy remains in the doldrums, not helped by that stubbornly high inflation rate.

The fall in yields followed a similar pattern else where with US Treasury 10-year yields at 2.87% (-2bp) and the 10-year Bund yield declining 5bp to 0.71%. BTPs were back below 2% to 1.99% (-7bp) and Bonos below 1.50% again at 1.46% (-5bp) – all in the 10-year benchmarks.

Equities were higher across the board, rounding off a very good week of recovery in markets previously battered and seen as down-and-out. The US markets closed flattish on Friday, having been up as much as 1%, likely on the back of those 13 Russians being indicted for interfering in the US election. It’s also a holiday in the US on Monday (President’s Day), so we’re going to open in defensive fashion most likely.

Bitcoin continued to recover, now at $11,000 per coin.


The iTraxx indices continued their recovery after suffering some material weakness into the equity market sell-off. Main dropped 1.6bp to close the week at 51.3bp while X-Over was back at 261.7bp after dropping 6.4bp on Friday.

In cash, we moved in similar vain – tighter, although for a Friday flows and flows remained light. The Market iBoxx website was undergoing maintenance at at the time of writing, so we will update the numbers at close of business on Monday.

For this week, the US markets are closed on Monday, the earnings season starts to wind down with Walmart and Home Depot prominent for the retailers, and we have the Fed minutes from January’s meeting to scour through for clues on the rate hike situation (three pencilled in 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.