11th October 2017

Where’s the juice?

iTraxx Main

55.2bp, -0.8bp

iTraxx X-Over

242.1bp, -2.5bp

10 Yr Bund

0.47%, +1bp

iBoxx Corp IG

B+105.8bp, -0.5bp

iBoxx Corp HY

B+274.7bp, -2.5bp

10 Yr US T-Bond

2.34%, unchanged

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″]

Squeezing it out…

Grind, grind, grind. It’s relentless and it continues. Corporate bond spreads are on that slow path to record territory for IG risk, and are in record space where high yield is concerned. And it’s higher beta risk where the money is going.

We’re not complaining, it’s just that it is not terribly exciting at the moment. That’s supposedly a good sign, because investing in corporate bonds is not meant to be an exciting pastime. The corporate bond market has barely flinched on the ongoing Catalan/Spanish spat, just as it has remained relatively resolute through the other various event-risk episodes over the past couple of years. Equities have been setting record highs and rate markets yields have stayed relatively low, failing to break materially higher on improving growth dynamics amid the prospect for higher rates.

Into that, the money keeps flowing into the corporate bond market. Receptivity to new deals is still extremely high – we’re just not getting them in anywhere near the volume we would like. But the support for corporate bonds is resolute and for the moment we are backed up by the ECB’s QE buying programme. While they take 15% of the eligible market with over €116bn of IG non-financial debt, investors are largely left to focus on the primary market.

Still, as spreads go tighter and corporate bond yields lower, the cash looking for a home is heading for higher yielding debt – just as the Street decides to make providing liquidity even more costly. Hence the exaggerated tightening amid reduced flows in the high yield market, but also in higher yielding corporate bond assets.

The CoCo market spread tightening might have stalled of late (220bp tighter on the cash index YTD, but only 25bp tighter in the last month) perhaps on Spanish fears, but the non-financial corporate hybrid index is 10% tighter in the last month (-28bp) after barely moving for the best part of 3 months before that. At B+239bp, it is 110bp tighter YTD, the heavy lifting having been done in the first quarter. Now? It has suddenly found some favour again.

To highlight the stunning level of the corporate hybrid market, the record low in spreads is B+230bp (iBoxx index) which we saw back in Q1 2015. And the yield level was 2.47%. The market has since grown in size by a conservable margin. At B+239bp we’re just 9bp away from setting a new record, while the current index yield of 2.36% is a record low. We wouldn’t necessarily think that is exciting, but more frustrating in that a ‘subordinated’ debt product offers such a low level of return/spread/yield than what we might have been used to.

High yield primary edges to record

Two borrowers added €875m to the high yield issuance total leaving us moving rapidly towards that €57bn figure that would make this year a record for supply in this market. We’re currently up at €52bn. We can only be impressed by the number of deals we are seeing, with €3.7bn printed this month so far.

Vallourec in for €400m in HY

The deals in Wednesday’s came from Vallourec in a €400m offering in 5NC3 structure which was priced to yield 6.625%, and from Empark in a dual tranche effort. The group raised €350m in a 7NC3 fixed deal and €125m in a 6NC1 floater format.

In IG, we had just a paltry €300m offering from Italian utility A2A in a 10-year maturity priced eventually at midswaps+87bp, which was some 23bp inside the opening guidance. The deal takes the total for the month-to-date to €5.1bn, of which €3.3bn has come from 5 Italian based borrowers.

The other deal flow in the session saw Aroundtown Property (£500m) and ABN Amro Bank (£450m) in the sterling markets, along with a spate of dollar activity.

Otherwise, the day passed with little incident. Rate markets closed pretty much unchanged, leaving 10-year Bunds to yield 0.47% (+1bp), Gilts in the same maturity 1.38% (unchanged) and ahead of the Fed minutes release we had Treasuries unchanged at 2.34%. Equities closed out in Europe all a little higher in an uneventful session although the FTSE was just in the red.

In credit, it was another positive session. The first port of call is usually the synthetic indices and they were better offered in the day (tighter) with Main at 55.2bp (-0.8bp) and X-Over lower at 242.1bp (-2.5bp).

As for the cash market, spreads inched tighter leaving the Markit iBoxx IG cash index was down at B+105.8bp (-0.5bp). We are 3bp away from he lowest level seen this year on this index, and just 12bp of tightening away from the record low (of B+94bp). The high yield market index was down at B+274.7bp, tighter by 2.5bp in the session and at a new record low. And that after €875m in the session. Cash? There is plenty of it still looking to get invested.

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.