12th December 2017

I gave a letter to the postman

iTraxx Main

47.3bp, unchanged

iTraxx X-Over

233.0bp, +1.2bp

10 Yr Bund

0.32%, +3bp

iBoxx Corp IG

B+98.4bp, -0.3bp

iBoxx Corp HY

B+299.5bp, -1.5bp

10 Yr US T-Bond

2.42%, +3bp

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″]

UK inflation rocketing

With the central banks in focus as the Fed, ECB and BoE all meet for their monthly deliberations, the markets were always going to limited in their activity. Even though we know what is likely going to be the outcome, investors have chosen to stay put and not try anything clever so late in the year.

Even Bitcoin was less exuberant as compared to the recent volatile intraday moves around prices. The Fed is fully expected to raise policy rates by 25bp, the ECB will refrain from altering course as will the BoE’s Monetary Policy Committee. And for the latter, that comes even after inflation numbers in Tuesday’s session showed that consumer price inflation reached six-year high of 3.1%, thereby squeezing real incomes further. The Governor of the BoE will be writing to the Chancellor soon enough.

The oil pipeline fracture in Scotland and explosion at Austria’s main gas hub meant that commodities were front and centre as prices for oil rose to their best levels for almost two years with Brent almost at $66 per barrel. For the rest, it was a case of little happening as equities were treading water at just slightly above their small opening levels and credit offered nothing.

The real estate sector has seen record-breaking borrowing this year, and we had Unibail-Rodamco debt come under some pressure as the company agreed to buy Australia’s Westfield Corp for almost $16bn in a part debt funded deal. There will probably be some rating pressure on Unibail (A/A+ from S&P/Fitch), but the weakness in the former’s debt was limited (less than 10bp cross the curve).

In another separate development, and as we see it the pettiness in the EU’s reaction to comments made by the UK’s Brexit secretary over the weekend are unwarranted and could lead to a more fractious relationship than the one which already exists. Breaking up is hard to do!

Judging by the lack of primary, we could have already effectively closed for the year – in IG non-financial corporate credit anyway, especially as we do not expect anything after this week. And when primary is so light, there is little else to focus on because secondary has been bereft of any material activity for a good while yet. Even the ECB has suggested that it will curtail debt purchases after the 21st December until the end of the year, so as to not distort the market (because liquidity is extremely poor during this period across the whole market) – and in our view, distort it any further. Because the ECB’s €1trn+ bond buying programme has been part of the biggest financial market manipulative event in history. Of course the Fed and BoE have been equally as culpable in this respect.

It’s all but over in primary

Overall, it has been a good year for the primary markets, largely rescued by a solid final third of the year. For IG, the annual supply so far as come in at €265.4bn and should we fail to get another €1.5bn before year-end, it makes 2017 the third-best in history which would be an excellent result given that we were over €80bn issuance light of the current level as we came out of the summer period.

The story, though, has been around the high yield primary market where we have smashed the previous record level of €59bn in 2014. With still some deals to print this year, we are already up at a super €75bn of supply for this year. Given that welter of issuance and the massive tightening on spreads (iBoxx index around 120bp) as well as the 6.2% of returns, this market has been on fire. For sure, we appreciate that a greater level of cash has been going into IG funds, but those funds have been buyers of high yield risk given the more meagre pickings in the investment grade market.

Senior issuance has disappointed, and according to our records, this year’s €136bn of supply is the lowest since the euro currency era. We’re €9bn shy of last year’s total, and the current monthly run rate suggests we’re going to fall short of that level. Almost two weeks into December, we are yet to record a senior financial offering.

Positive tone but drab session

There was a back-up in rate markets in the day as equities got bit of a boost. Yields edged higher by a couple of basis points in most safe-haven sectors. Benchmark 10-year Gilts were yielding 1.22% at the close, Bunds 0.32% (+3bp) and Treasuries 2.42% (+3bp) as PPI beat expectations at 0.4% versus expectations of 0.3% in November versus the previous month.

As for stock markets, the FTSE added 0.60%, the DAX 0.4%, while the Dow and S&P were also comfortably in the black and the Nasdaq flattish.

For credit, as seen through the eyes of the synthetic market, iTraxx Main closed the session unchanged at 47.3bp. X-Over was a little higher though as it shed a whole basis point plus a fraction to 233.0bp (+1.2bp).

In cash, we edged a touch better for choice and that left the iBoxx IG index at 98.4bp (-0.3bp). Cash in IG hasn’t really moved for two weeks. For the high yield market, we edged better – for a change – but the moves were small. The index closed at B+299.5bp (-1.5bp).

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.