19th May 2019

It isn’t getting any easier

iTraxx Main

64.9bp, +1bp

iTraxx X-Over

278.2bp, +3.8bp

🇩🇪 10 Yr Bund

-0.105%, -1bp

iBoxx Corp IG

B+135.2bp, -1.4bp

iBoxx Corp HY

B+438bp, -2bp

🇺🇸 10 Yr US T-Bond

2.39%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Funnily enough….

The markets threatened a rout and all the ingredients were there for a steeper sell-off in last week’s final session. But we’re showing some resilience. Actually, corporate bond market investors find themselves in a good situation at the moment, and we think the conditions for that being the case are going to persist through the rest of 2019. As long as we meet them, which keep a Goldilocks-like macro environment in place, then little is going to change. Credit markets are in good shape with performance across all sectors exceeding expectations year to date, and much needed primary issuance picking up after a late April lull.

It all comes about to a large extent because Trump is fighting battles on several fronts even as he has rolled back on the threat of tariffs on European auto imports into the US. The big one, though, is with the Chinese but they are hitting back. At the moment it is through official news media as they refuse to roll over, but they’re beginning to respond and dig in which is leaving the markets jittery and in some sort of limbo.

Thus global macro remains difficult and 3%+ global growth this year is under threat pending the outcome of the US/Sino trade dispute. More so, 6%+ annual GDP growth in China (its perceived bare minimum) looks like it is at risk, too. Investment and spending across all manner of markets are being hit. In addition, the Gulf is fast becoming a major hotspot now and could easily spiral out of control. So, numerous geopolitical situations are affecting confidence across the globe. Central banks remain wary, watchful and have little choice but to espouse dovish sentiment with policy most likely to follow suit.

Goldilocks is good for the corporate bond investor

So as suggested, to a large extent that all plays into the hands of the corporate bond investor. Goldilocks is good. It means that rates stay low. And they stay low for longer. We’ve barely had a corporate event to worry about this year.

The default rate stays low, too. Rating transmission risks are supportive. Funding costs are staying at their historic low levels. There’s barely a wall of funding risk to talk about.

Service debt obligations? Easy. After all, that’s the true measure of credit quality. And moreover, we have some great performance. Almost 4% for IG in total returns and spreads almost 40bp tighter YTD is better than anyone could have expected when we started out this year. The high yield market has returned well over 5% YTD and the CoCo market over 7% YTD.

Those performance levels are off higher levels, incredibly. We’ve just given some back of late as have all other risk assets. Should we continue to do so, it will be more that spreads have widened rather than rates have risen. The former could happen if event risk on macro or otherwise takes hold and equities drop. But the prospect of sharply higher rates isn’t on the radar. We have dovish-oriented central bankers, policy remains loose/accommodative and the chances are it will become more so.

And so, credit continues to be fairly well-supported although it is difficult to suggest that it is in the ascendancy. It’s defensive at the moment but also offers a good pick-up versus risk-free assets (government bonds). Thus, corporate bonds offer a decent return and capital preservation at a time when equity volatility has risen.

What’s not to like? Certainly, inflows continue so asset allocators are recognising some of the aforementioned characteristics.

Primary churning out deals

The primary market remained open right through the week. That’s a good sign and deal oversubscription was also good, suggesting that demand for corporate risk remains elevated. Fidelity National’s 6-tranche, €5bn euro-denominated was the standout deal, although Sampo’s €500m subordinated T2 offering was 9x oversubscribed. Fidelity also issued a dual tranche sterling deal.

On Friday, Volvo issued €300m in a 3-year at midswaps+30bp which garnered almost €2bn in orders and saw the leads cull the initial price talk by 25bp. Scant reward for investors.

The other IG non-financial deal in the session came from Euronet Worldwide, the borrower lifting €600m in a 7-year at midswaps+130bp which was 20bp inside the opening guidance on books over €1.5bn. Real estate group TLG Immobilien issued €600m in a 7-year at midswaps+160bp.

So IG non-financial issuance for €9.6bn got away last week and the total supply for the month rose to €17.6bn, on target (we think) for that €25-30bn area we are looking for in May’s deal total.

In high yield, we just had B2Holding’s €200m deal last week, taking us to €3.4bn for the month and almost €24bn for the year to date. Here, we’re on course for that €45bn – €50bn total for the full year.

Clouds darken, equities unsure

China is now hitting back and clearly considering its position and options, as we might expect. The first steps have seen her voicing concerns through official news media but we can expect more concrete measures as the imposed June 1 deadline approaches and those higher tariff levels kick-in.

A volatile session saw some big swings in US stocks as they moved in and out of the red/black, only to close 0.6% lower. The Dax closed 0.6% lower too but spent the session in the red, while the FTSE closed flat as it gained a boost from sterling’s weakness as investors fretted about the political situation in the UK. Even Bitcoin’s recent resurgence seemed to have run out of steam on Friday.

In rates, yields recovered off their lows in the session. The 10-year Gilt yield declined to 1.03% (-4bp) – and support gilts came on concerns of a Tory leadership battle to come and reflects the uncertainty we have and will continue to have around the Brexit situation with a hard-Brexit back on the table. The Bund closed to yield 0.105% (-1bp) in the 10-year and the US Treasury was yielding 2.39% into the close (-2bp).

There is little doubt that the secondary market has seen a widening in spreads. The IG iBoxx index is, after all, 14bp wider this month and now at B+135.2bp (-1.4bp on Friday), but the index is still 37bp tighter this year. Support for the underlying on the other hand had propped up total returns and they combine at 4.05% YTD, as mentioned earlier.

The sterling market hasn’t been affected too much by the Brexit debate/potential for another UK general election, although one would argue that its the reason why Gilts have rallied of late and boosted returns. At G+159bp, the index is just 7bp wider this month but still 31bp tighter this year with total returns at 5.5%.

The high yield market is likewise giving some back but still in decent shape from a performance perspective. The index has widened 40bp this month to B+438bp but is still 85bp tighter in 2019 so far, with total returns for it at 5.7%. Not bad at all.

So, as for this week, the European elections on May 23/Thursday will dominate the stage here. The earnings season in the US comes to an end but we have a while host of European corporates still due to report. On the macro front in the US its durable goods while in the UK inflation numbers and retail sales all for April are due. German GDP for Q1, French and Eurozone PMIs and the Ifo survey will have focus too. A host of Fed officials are slated to speak this week and we have the minutes of the last FOMC published on Wednesday. No doubt a tweet will Trump it all.

Have a good day.

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.