24th February 2017

Treading water

FTSE 100
7,271, -31
11,948, -51
S&P 500
2,364, +1
iTraxx Main
74bp, unchanged
iTraxx X-Over Index
294bp, unchanged
10 Yr Bund
0.23%, -5bp
iBoxx Corp IG
B+137.26bp, +0.25bp 
iBoxx Corp HY Index
B+377.5bp, +1bp
10 Yr US T-Bond
2.38%, -4bp

Waiting to trade the next “event”…

A surprisingly very limited session that was neither decisively risk on or off. The markets didn’t quite come to a standstill, but there wasn’t too much to get excited about into the penultimate session of the week. Still, if we can hold at these levels, it’s going to be a good month for both equity and fixed income investors. Equities have continued to rise while for the latter it’s been about recovery from the negative returns recorded in January to help most markets back into the black. High yield returns for that matter has been flying.

The slew of earnings were very good in the main, but there was little by way of a follow through into the equity market which chose to trade out in a small range. Government bonds were better bid but we couldn’t really think why that would be the case, save for the rally in OATs. Here, the markets likely felt oversold but boosted by the news that the centrists were ganging up together in the forthcoming French elections. The 10-year OAT yield dipped below 1.00% having been up as high as 1.15% a few days ago.  Treasury yields were lower, and Gilt yields dropped to 1.15% (-5bp) for the 10-year maturity.

In primary credit, IG non-financials drew a blank leaving us with less than €3.5bn of issuance this week so far – and less than €15bn for the month with three sessions to go. At least we had a couple of sizeable deals to open the account for the week (better late than never) in the high yield market. They came courtesy of a €475m issue from Levi Strauss and an increased €1,425m offering from Quintiles IMS, taking the monthly total for this market to €4,050m. In financials, there was a re-marketed deal for €1.35bn from Veneto Banca and £750m issued by Deutsche Bank.

The HY market has seen more issuance in both January and February versus the corresponding months last year, while in the IG market last February saw over €25bn of issuance. The same month in 2015 recorded over €40bn of deals. That’s a huge divergence in issuance for a February in the last 3-years in IG non-financials, but this year’s low levels of supply for February can’t be put down to the earnings blackout period, or jittery markets – because they’re not. And we also know the demand side of the equation is intact, as judged by the level of oversubscription for just about every deal issued this year resulting in the alarming ease with which syndicate desks see fit to ram final pricing tighter.

There’s almost an arrogance in that “take it or leave it” attitude which can only end if enough investors pull out of deals when final pricing is made known, or we get much much more issuance.

Bond yields head lower

Bond markets had a decent session, with yields lower across the board. We’re not sure whether the move was for defensive reasons or if as some have suggested a reaction to taking a dovish view on yesterday’s Fed minutes. For 10-year maturities, the Bund was yielding 0.23% (-5bp), while the US Treasury was down 4bp at 2.38%. The Bund/OAT spread dropped to 74bp (was lower) as independent candidate Bayrou dropped out of contention an dsubsequently urged his supporters to back Macron.

The move for lower government bond yields so late into this month will be welcomed by total return corporate bond market investors as performance will be further boosted with just 3-sessions needed to hang on to before the month-end marks go in. January was very weak for govvies, just weak for corporates bonds but very good for US equities. February will be good for them all.

Credit holding on

In its latest release, the Bank of England communicated that purchases under its corporate bond QE programme are now up at £7.4bn almost five months into an 18-month programme to lift £10bn of IG non-financial sterling denominated debt. The last lift of around £300m is a drop from the average weekly haul, but still good going and still looking like the exercise will finish inside a year. Spreads in this market closed unchanged, but the rally in the underlying helped the index yield drop a little and returns YTD are up at 0.8%, completely reversing January’s losses.

Elsewhere, spreads continued to hold in a tight daily trading pattern, and we closed the session roughly unchanged, with the Markit iBoxx IG cash index at 137.26bp (+0.25bp). Secondary market liquidity remains poor and it is increasingly difficult to source bonds with the Street also reluctant to let much risk go. Nevertheless, returns are creeping higher and now reside at 0.5% YTD, representing a good months work (so far).

The high yield market had to contend with those two new deals, but even that near €2bn of supply failed to make much of a dent to existing valuations as the market only edged a touch wider for choice, the cash index left at B+377.5bp (+1bp). And finally, we had another quite unremarkable session in synthetic credit, with Main at 74bp and X-Over closing at 294bp – both unchanged.

Have a good weekend.

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.