20th March 2017

Time to crack on

FTSE 100
7,425, +9
12,096, +12
S&P 500
2,378, -3
iTraxx Main
69.75bp, -0.75bp
iTraxx X-Over Index
275.5bp, -2.5bp
10 Yr Bund
0.43%, -2bp
iBoxx Corp IG
B+130.7bp, unchanged 
iBoxx Corp HY Index
B+366.6bp, -1bp
10 Yr US T-Bond
2.50%, -4bp

Roll up those sleeves

Let’s just get on with it. We’ve just been through what could have been fairly perilous week, and emerged intact with risk assets generally better bid. The road is clear for a few weeks now, in order for us to get some performance under our belts. Although, for total return players in fixed income that might mean losses, as government bonds prices could come under some pressure into better climes on the macro front.

That’s still to be seen, given that the recent data streams are quite mixed albeit with a slight bias to the upside/recovery. We would think that current strategies will remain in place. In credit that means long risk – slightly higher beta than index (1.0) – through a positioning which is perhaps now only slightly long index duration but with holdings clearly biased towards lower rated debt (overweighting triple-B for IG funds, for example).

The week that just passed saw the Fed play a fairly deft hand with their rate hike, laced with a dovish outlook. The market was wrong-footed and the classy Fed move made for higher equity and checked the weakness in we had seen in Treasuries. It would appear they’ve laid the groundwork for just two further rate rises this year, but the incoming data will no doubt have the markets think three could still happen.

The Dutch elections swatted aside Wilders mania (populist vote) but while the far-right PVV was beaten and all of the European establishment relieved as a result, the party took enough seats to suggest they’re going to be a thorn in the side of whatever coalition is formed in the Netherlands.

The result ought to have given heart to Macron/Fillon/Merkel – and the markets – into the French and German elections.

Looking for secondary credit to push on

We have two full weeks of activity ahead of us, and a good opportunity to get some performance under our belts given that there is pretty much a clear run to do so. The earnings season in Europe is drawing to a close, we’re light on economic data and French election jitters will likely resurface into April.

Spread markets closed out last week unchanged with spreads anchored at or around their lowest levels for 2017, as measured by the broad cash Markit iBoxx corporate index. For investment grade, the index is at B+130.7bp and that is around 4bp lower this year, although the back-up in yields does leave returns residing slightly in the red year-to-date.

We think a tightening in cash to B+128bp is a reasonable target to aim for into month-end if the distractions for risk assets remain very limited. We’ll get perhaps €10bn of issuance into it (which will only serve to boost confidence), the ECB is still lifting close on €2bn of IG debt a week and quarter-end can be pivotal for investors wanting to get their portfolios positioned for the next quarter.

The high yield market is going great guns, though, and has been the corporate bond market’s star performer this year. The iBoxx cash index closed a touch better on Friday and flattish for the week at B+366.6bp, and that is just 6bp off the lows for this 2017 – but a stunning 47bp tighter year to date.

For the return accounts, the index is showing over almost 1.2% of positive performance. There’s little reason not to believe the high yield market can see spreads south of B+350bp with returns nudging past 2% over the next few months. Supply has picked up of late, but not enough to alter the dynamic versus demand.

Spreads might be flat for the year in sterling, but the choppy Gilt market is pushing returns for sterling corporate bond markets in and out of the red/black. As things stand, they’re in the black at 1%, having been flat a month ago. As for the synthetic market, iTraxx Main closed below 70bp again (a rarity these days) at 69.75bp (-0.75bp) while X-Over closed out last week at 275.5bp (-2.5bp) and that relationship at 3.95x.

Primary markets ready and willing

Hygiene & forest products company, SCA, was last week’s biggest borrower with €2bn

IG non-financial corporates delivered €6.35bn of issuance last week from 7 borrowers taking the monthly total to 15.5bn. SCA Hygiene was the largest borrower in the market last week with a 4-tranche €2bn effort – and the group is actually the largest borrower this month too. As suggested above, we think another €10bn is easily possible, perhaps even €15bn should some issuers decide to bring their funding forward as to not be affected by any potential for disruption into the French election season.

High yield primary has a stack of deals on the road and/or readying for launch. Conditions are good and markets are receptive. The month has been very good thus far with almost €5.6bn of issuance, while secondary spread markets have held relatively robust into the supply suggesting plenty of cash on the sidelines. €10bn for the month as a whole might be a tough ask, but another €2-3bn is easily possible.

So, we go into this week reliant (as ever) on primary to keep the corporate bond markets interesting. We have various Fed speakers on the circuit while we have a raft of data out from the UK. There are reasons to be generally upbeat.

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.