17th January 2017

USA Inc.

FTSE 100
7,329, -9
11,559, -70
S&P 500
2,275, closed
iTraxx Main
69bp, unchanged
iTraxx X-Over Index
290bp, +3bp
10 Yr Bund
0.32%, -1bp
iBoxx Corp IG
B+136bp, unchanged 
iBoxx Corp HY Index
B+391.5bp, +1.5bp
10 Yr US T-Bond
2.40%, closed

Running it like Trump only knows how…

President-elect Trump was the reason the session failed to pass without any nervousness, given that Monday was the Martin Luther King Jr. Day federal holiday in the US and we ought to have.

Mr. Trump’s interview over the weekend with a UK newspaper stirred a few, and we can now look forward to his economic policy as being one of running the USA like a ‘company”.

His style of communication, manner of it and the early mumblings certainly smack of that being the case. Hopefully it’s with less of the financial leverage than what his companies are used to! Trump knows he is the biggest gunslinger in town, the US have the deepest pockets of anyone and we do it their way – or find an alternative which will require some serious shift in political and economic thinking.

It might take in some economic pain, while the geopolitical landscape is going to require new thinking. They have a businessman in charge, not a politician.

And the markets have reacted.

They’ve not necessarily taken fright, but there was a more defensive bias around them. Equities were better offered, government bonds slightly better bid, credit mixed but valuations holding well, while the primary market delivered more than we would have expected – although mainly covered bonds and a couple of senior financial deals.

The sterling currency was under some pressure as ‘hard Brexit’-like fears surfaced following a no-nonsense interview over the weekend from the Chancellor in the German press.

So, after a fairly decent opening two weeks, the markets have a lot to contend with already. Other news saw that Italy lost its single-A rating at DRBS but that was shrugged aside and probably seen as long overdue anyway, and it had little impact on the sovereign’s bonds. The IMF improved on its growth expectation of the global economy from 3.1% this year to 3.4% courtesy of President Trump’s much-anticipated fiscal profligacy and an improvement in Chinese growth.

Fear not, the ECB is still lifting the market

It has not been difficult for investors to sell bonds and the bid has been decent for those looking to reduce any exposure – usually to make room for new deals. The Street may be seen to have been accommodative, but if they are it likely comes on the back of knowing that the ECB is a dependable buyer of paper, or that spreads are unlikely to explode anytime soon because of that ECB backstop bid. The Street is no fool.

In its latest release, the ECB reported that its corporate bond purchases had risen to €54,010m representing a weekly effort of higher than the recent average – and up at €2,171m. Comparing that to the issuance that we have had last week (or this year so far), they’re taking out over 10% of the eligible market at the current run rate. Small wonder that the corporate bond market is in decent shape – but we should be seeing a tightening trend, of which we are not.

Deutsche Bank did a €1.5bn deal in Primary

Thus far valuations have barely moved. We can blame primary in a sense because it has been buoyant with €15bn of non-financial issuance and whole load of senior supply, too. Nevertheless, we should not have to wait for a few sessions’ grace in primary to allow for secondary to receive investor interest.

Primary saw €1.5bn from Deutsche Bank in 5-year senior funding while property group LEG Immobilien AG raised €500m in a 7-year deal. The IG non-financial market drew a blank. In sterling, pension fund group PGH Capital raised £300m in Tier 3 notes at G+337.5bp.

Session fizzles out

Any early excitement didn’t last and we saw the session close with little happening. Stocks in Europe were lower by up to 1% with the periphery feeling the worst of it likely on the back of that Italian sovereign rating downgrade.

The Bund closed just a touch better bid to yield 0.32% in 10-years but Gilts had a good session of it, the 10-year yielding 1.32% (-5bp). Italian yields closed unchanged at 1.91% and the 10-year Spanish Bono was at 1.43%, also unchanged.

Secondary markets did very little and that was captured in the closing valuations which left the Markit iBoxx IG corporate bond index unchanged at B+136bp. Sterling spreads were a little wider though at G+148.7bp (+1bp), probably driven by defensive valuations amid the shenanigans around Trump/Brexit/sterling and the uncertainty that triumvirate as well as other events might bring.

The high yield also did very little save to end slightly wider, the iBoxx index at B+391.5bp in a fairly uneventful session. iTraxx Main closed unchanged at 69bp and X-Over at 290bp (+3bp).

Looking for a little more activity today. Have a good day. Back tomorrow.

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.