21st February 2018

Things can only get better

iTraxx Main

51.5bp, -0.9bp

iTraxx X-Over

264.5bp, -3.1bp

10 Yr Bund

0.72%, -1.5bp

iBoxx Corp IG

B+87.5bp, +0.25bp

iBoxx Corp HY

B+299.2bp, +1.3bp

10 Yr US T-Bond

2.95%, +5.5bp

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″]

Christmas blues…

It feels like December, not late February. The only difference in the credit market is that no one is winding down for year-end, but instead champing at the bit to get some new primary issues on their books. The last meaty (in size terms) deals came from Novartis and Unilever during the opening week of the month when they issued €4.25bn between them.

The last benchmark deal with a bit of spread was the McKesson offering (maturity Oct/2026) priced at midswaps+67bp – in that same opening period. We’ve barely seen a deal since in non-financials worth a mention. It isn’t much better in high yield, although the almost €2bn we have had in February would be seen as a decent result for most months. The €2.75bn of senior financials supply suggests that all types borrowers are holding off for the moment, just as we know that pipeline continues to build.

The primary sluice gates must open in March. That means lots of competing deals. It might put a bit of pressure on ‘final’ pricing levels, but if the demand side of the equation remains super firm, then we would think that market confidence will win out and reoffer levels materially tighter versus initial guidance as they have been (circa 10-25bp). Fun and games.

Primary activity in the session was again littered with covered bonds issuance, while we had a couple of deals in sterling, with a £250m debut offering from truck-maker Scania and a combined £500m split equally between 12-year and 35-year maturities from the London & Quadrant Housing Trust Ltd.

So, few are chasing the markets in secondary. It’s dull. Still, the ECB is busy and managing to almost single-handedly keep valuations intact as they manipulate the most illiquid of markets. Their heavy lifting, though, has been a failure over the past few months in terms of keeping spreads/yields-tight/low enough to provoke the corporate sector to remain on a flourishing issuance trend, as the central bank tries to force the issue of greater funding disintermediation. Primary is running at well-below average levels for an opening quarter of any year, that is.

Markets tread with caution

The FOMC minutes from the end of January meeting were due, and few were taking any chances ahead of it. There was a clear, cautious tone. Three US rate hikes are priced into the market while participants are forever fretting and searching for clues as to the potential for a fourth.

The news flow in the day saw the unemployment rate in the UK tick higher (to 4.4%), but the number of unemployed rose the highest in the month for over five years. The French and German economies continue to expand and there is a robustness about them, even if the latest PMIs for February saw some declines, to 57.8 and 57.4, respectively.

European equities tried in vain to get some momentum behind them, and after managing to spend much of the session in the red, came through to close mixed. This was in no small part to a positive open and subsequent upbeat session in the US where indices rose by over 1%, before fading the gains after the release of the FOMC minutes. Policymakers were upbeat on growth and optimistic on inflation – as we might have expected, so the moves were confusing.

There was a bid for duration, with Gilts particularly in the ascendancy. Some of it was probably due to that unemployment report – with two more to come before the May meeting – amid expectations of a rate hike then.

We even think that reports of the UK seeking an open-ended Brexit transition period might have introduced a bit of political risk. Ten-year benchmark Gilt yields dropped by almost 3.5bp to 1.55%, the Bund yield declined to 0.72% (-1.5bp) for the same maturity while the equivalent US Treasury yield shot higher to 2.95% (+5.5bp) – and all of the Treasury market weakness coming after digesting the FOMC minutes.

Credit better offered – just

The credit markets had a better day of it as evidenced by the iTraxx indices being better offered and moving lower. They eventually closed at 51.5bp (-0.9bp) and at 264.5bp (-3.1bp) for Main and X-Over, respectively. The indices effectively recovered the previous session’s losses.

However, going in the opposite direction was cash. The Markit iBoxx IG cash index was 0.25bp wider – basically unchanged – at B+87.5bp which ought not to have been the case, given the supportive issues (supply, demand, ECB and macro) mentioned above.

The very slight weakness was apparent in the contingent convertible market, the index just 3bp wider at B+338bp. Flows into any weakness are very small and we can easily go tighter as soon a bit of confidence (rather issuance) returns.

The HY iBoxx cash index also edged higher to B+299.2bp (+1.2bp). Enough on that given this market just doesn’t look at ease with itself.

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.