3rd March 2017

Up, up and away

FTSE 100
7,382, -1
12,060, -8
S&P 500
2,382, -14
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
276bp, -5bp
10 Yr Bund
0.31%, +1bp
iBoxx Corp IG
B+134.9bp, -6bp 
iBoxx Corp HY Index
B+363.7bp, -4bp
10 Yr US T-Bond
2.49%, +3bp

Sizzle and some fizzle

The week straddled a changeover month which turned out to be fairly exciting for the most part. We had deals, tighter spreads, positive returns, a super start to March for equities and even more intrigue around the US and French political scenes. For risk assets it was good, for safe-havens it was”bad’ish”, while from a political perspective it might still get ugly.

After the record levels set in Wednesday’s session for a whole host of equity indices, yesterday’s session was always going to be a more reflective one, allowing us to consolidate our winnings, think about the potential for market gains (or losses) for the rest of the month.

Overall, the economic data is looking very good everywhere one looks. If Trump manages to see out his presidency, we’re going to see growth potentially shooting higher by the time the year is out – and then for a while thereafter, as US government spending picks up. The market looks like it has factored in a potential rate hike for this month (FOMC meeting March 14/15) but that doesn’t stop us from expecting yields to go higher if they do actually raise policy rates. We ought not to get too much market volatility around any increase, though.

On the political scene and away from any crisis which may come from the Trump regime’s links with Russia, we focus mainly on France and Fillon’s candidacy for what is sure to be an exciting period between the first and second round of votes (late April-early May). The Bund-OAT spread continues to react to some sort of status quo being retained – that is, no Front National – and the European Parliament did its best to help out as it voted to lift Le Pen’s immunity from prosecution.

The cynic might suggest it’s another move by the establishment machinery flexing its muscles in order to try to preserve the status quo. After all, the future of the Eurozone as we know it might be at stake. The spread was little changed at around 61bp.

Generally, stocks played out in a tight range through the session (small down), government bond markets generally saw moderate weakness while credit markets were better bid.  However, it felt like we looked to close out the week early – and a little prematurely.

Primary slows, but interesting deals

Orange: €750m and €500m deals

For corporate bond markets, we had deals in IG non-financials (Orange), senior financials (ING and Sparebank 1), subordinated financials (Bankia) and a couple of hybrid issues in dollar and sterling currencies from Scottish & Southern Electric (SSE). The deals offered something for everyone. Low beta, high beta, spread, yield and they were fairly well dispersed by borrower type.

The plain vanilla deals of the day came from Orange with the telecoms operator issuing €750m and €500m in 6.5-year and 10.5-year maturities respectively, managing to reduce the initial guidance by 15-17bp into final pricing.

The borrower was the only IG non-financial borrower of the session and took the total for the opening two sessions of the month to €3.25bn from three borrowers which all happen to be French (RCI Banque and Air Liquide on Wednesday).

ING and Sparebank 1 took €1.5bn and €500m respectively, while Bankia’s €500m Tier 2 notes priced some 40bp inside the initial guidance on a 10x oversubscribed book! Everybody loves a little spread. In other currencies, SSE was the pick as it lifted £300m and $900m in two 60.5NC5.5 hybrid structures with books of £2bn and $5.5bn respectively, thus allowing the leads to tighten pricing by 35-40bp versus the opening talk. Staying with sterling, Stonegate Pub issued a total of £595m in a dual tranche deal, keeping the high yield investor base content.

Bond yields up as Fed looks to strike

US Treasury yields rose again as the expectations for a March hike rose, leaving the 10-year to yield 2.49% (+3bp) alongside a similar 3bp move in the 2-year (to 1.32%). Eurozone bonds outperformed, with the 10-year Bund yield up just a basis point to 0.31% with Gilts moving similarly to 1.21%, for the same maturity. Equities generally gave a little back – not unusual after the stellar gains in the previous session, down around 0.2% in Europe and a little more in the US.

In the credit market, we continued on our merry way knowing that bond yields are reacting to higher US rates and equities (moving lower) to a bit of profit-taking following the strong gains in the previous session. First off, credit protection costs continued to fall, with Main at 70bp (-1bp) and X-Over at 276bp (-5bp). They’re the best liquid credit market risk proxies and do highlight how sentiment (for example) looks towards the market.

In cash – and in its latest release, the Bank of England communicated that purchases under its corporate bond QE programme are now up at £7.71bn after just five months into an 18-month programme to lift £10bn of IG non-financial sterling denominated debt. The last lift of around £300m is the second time it has taken this much in consecutive weeks, but good going and still looking like the exercise will finish inside a year. Spreads in this market, as measured by the Markit iBoxx index, closed 0.5bp tighter at G+149bp.

In the euro-denominated markets, we saw the same picture – tighter. The Markit iBoxx corporate bond index closed at B+134.9bp (-0.6bp) and the HY one at its lowest level this year at B+363.7bp (-50bp YTD!). We’re finally getting some traction.

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.