11th March 2018

It’s too good to be true!

iTraxx Main

50.3bp, -1.5bp

iTraxx X-Over

253.6bp, -5.1bp

10 Yr Bund

0.65%, unchanged

iBoxx Corp IG

B+91.4bp, -1bp

iBoxx Corp HY

B+305.7bp, -3bp

10 Yr US T-Bond

2.89%, +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″]

But we will take it…

NFP: Payrolls rose by 313,000 in February & unemployment remained at 4.1 percent, the lowest since December 2000

If it wasn’t news of the forthcoming, remarkable and what would be historic meeting between US President Trump and North Korea’s Kim Jong Un, it was the superlative non-farms payroll report which came with a cooling in hourly average earnings. That was one super way to end the week.

However, it has left us all scratching our heads as to what is going on! US equities gained by well over 1% (Nasdaq hit a record closing high) while Treasuries didn’t quite sell-off as we might have thought they would. Credit rallied and although cash was quiet, protection costs were moving lower again and Main closing lower to trade at 50bp (been a while) – 4bp lower in the week, with X-Over 17bp lower last week.

So, Trump surprised (or didn’t) everyone in agreeing to meet his North Korean nemesis, and we’re all wondering what prompted the latter to propose a meeting – with all reasons from a dying (dead in the water) economy as sanctions bite, to the need for the current regime to extend its longevity. Probably a bit of both. As for non-farms, the US economy added 313,000 jobs in February (205k consensus expectation), but wage growth cooled year-on-year to 2.6% (from 2.8% previously) while the unemployment rate remained unchanged at 4.1%.

Work all that out! Whatever, the markets embraced the news – in the US especially, and while European markets didn’t push on in the same vein, they will eventually be pulled higher by the United States’ bootstraps. That will come as soon as Monday’s session most likely.

Well, we don’t need to. Something untoward might be occurring which will eventually come out in the wash – like a massive spurt of inflation, but for now, we just need to trade off the facts. First off, the level of geopolitical event risk has potentially dropped quite markedly. Even though events around the Korean peninsula have been relatively quiet of late, the news of this meeting (if it really does materialise by the end of May) has removed some significant risks and, in a flash, given the markets a massive boost. Second, the global growth dynamic still has ‘Goldilocks’ written all over it which means we have every reason to expect risk assets to gain from here.

And they did in Friday’s session as the Nasdaq reached new peaks, and the S&P and Dow now just 3% and around 5%, respectively, from hitting fresh peaks. That’s just a good week’s activity supported by the positive tone and the momentum is certainly there for it to occur sometime before this month is out.

Credit primary has high yield in the ascendancy

We closed last week in a positive mood in the credit markets too, with a couple of high yield deals timed perfectly with the improved equity markets. Those deals came from Hertz Holding Netherlands as the borrower took €500m in a 5NC2 structure but priced at the wider end of the initial talk at 5.5%, while Peugeot issued an upsized €650m in a 7-year deal to yield 2.05%, 20bp inside the opening talk. There was nothing in senior or IG non-financials.

With those two high yield transaction the supply for the month rises to €4.45bn and to €12.9bn for the year to date. that’s suddenly become good going after a fairly anaemic period before last week’s €4.05bn of deals (Teva Pharmaceuticals issued €1.6bn).

Whilst the high yield primary market has burst into life, the same can’t be said for IG non-financial corporate bond issuance. For the opening period of March, we have seen just €5.05bn of deals, with €1.5bn of that coming from a three-tranche deal from SAP. The sector has delivered just €34bn in the quarter, the lowest level ever seen for an opening quarter so far, although the next three weeks of the month could change the picture.

Secondary closes a better week

The Markit iBoxx IG cash index closed at B+91.4bp, a basis point tighter on Friday and just 1.5bp tighter for the week. We would think that the index is set to go lower, as spreads tighten into any upside garnered from equities. We do need the IG primary markets to be a little more effusive though, as good deals will generate higher levels of market confidence and that will filter through into tighter spreads.

Nevertheless, the tightening in spreads is welcomed, and we saw the CoCo market slightly better bid too, such that the iBoxx index was 5bp tighter at B+324.5bp (15bp tighter in the week). Even high yield, for once, managed to move by more than +/-2bp, as the index tightened by 3bp to B+305.7bp – 8bp tighter last week.

Interestingly, total returns for the year thus far show the corporate bond markets win Europe in a good light in comparison to European stocks. US markets are in decent shape. Returns are a small negative in both the high yield and IG markets (less than -0.3%), while the Dax (a total return index) is down 4.5%, the FTSE is off by 6% and the S&P is higher by over 4%.

Going forward, much is going to depend on how the headlines play out. First and foremost, there is going to be increased scrutiny of that forthcoming US/North Korean summit. On the data front, we have US CPI with the core figure slated to come in unchanged for February at 1.8%. We also have US consumer sentiment and retail sales to low forward. In the UK, it’s the Chancellor’s spring statement on Tuesday, with much focus on the post-Brexit payments to Brussels as modelled by the OBR.

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.