16th June 2019

You can’t stop the music

iTraxx Main

61.7bp, unchanged

iTraxx X-Over

274.1bp, +1.4bp

🇩🇪 10 Yr Bund

-0.25%, -0.05bp

iBoxx Corp IG

B+136bp, unchanged

iBoxx Corp HY

B+451bp, +1bp

🇺🇸 10 Yr US T-Bond

2.09%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Nobody can stop the music

We can probably brush away the impending milestone of -0.30% yield on the 10-year Bund, given that after hitting a record low intraday low of -0.27% it’s just a Trump tweet or a skirmish away from it. Something thereabouts is now being dismissed almost as being a normal state of affairs. The worries pile up when we get to -0.50%, while we have a record low on the 5-year Bund yield. A consequence of these extremely low yields is that in credit, curves are incredibly flat from 7-years out to 20-years, as investors chase additional yield and are forced to take on much duration risk.

We have the Eurozone economy weakening without there being a sense of financial or systemic catastrophe, but the ECB will feel compelled to act in excess of the already announced TLTRO in order to try and stem the decline. The outlook continues to darken, not helped by the slump in Chinese industrial output to 5% in May – a 17-year low for which the ramifications will be felt globally.

While all that is being considered, corporate bond market investors are collecting their rewards as returns rocket higher. Corporate borrowers are collecting their free cash as funding costs collapse. Returns are very good so far this year, mainly because Q4 2018 was so bad, and we think they are sustainable. But there will not be enough chairs when the music stops although, having said that, the music seems to be on a permanent loop.

At this halfway stage of the month – and as we approach the same stage for 2019, fixed income has bagged a whole lot of performance. Incredibly, Eurozone sovereigns (as measured by the iBoxx index) have returned 5% year-to-date, with 1.2% of that in the last two weeks. That’s a fantastic level of performance for a historically staid asset class but actually highlights the situation we find ourselves in regarding a precarious macro outlook. The expectation is for policy action if only to keep papering over the cracks.

The hunt for yield in a relatively safe asset class has benefited the corporate bond investor too. The IG market has returned 4.5% year to date and 0.6% in the last two weeks. The CoCo market is sitting on returns of 8% with almost 2% of that this month. Brexit has failed to ravage UK assets, with sterling credit (all iBoxx index) returning 1.2% in June so far and 6.8% year to date. In the high yield market, it’s a respectable 6% total returns this year and 1% in June so far.

No chance of a breather in primary

We ended last week with a little flurry of deals – and more than what we are normally used to in the final session of the week. IG non-financial issuance comes in at €19bn for June, setting us on target we think for around €35bn for the full month – which if the case, will be the best June month since 2014. It’s already been a good month for senior financial issuance, up at €12bn while the high yield market has piped up with €2.6bn and €28bn for the year thus far.

Senior financials delivered Aegon Bank which issued €500m in a non-preferred 5-year priced at midswaps+90bp. That final pricing represented a 25bp tightening off an order book up at a heady €3bn. The other senior deal was Banco BPM’s €500m, also in a 5-year maturity but a senior preferred structure at midswaps+280bp, with books up at just €650m.

Engie SA was the sole IG non-financial borrower, plumping for a dual-tranche offering for a combined €1.5bn. The 8-year €750m came at midswaps+37bp (-23bp versus IPT) and the 20-year €750m transaction at midswaps+77bp (-18bp versus IPT) with combined books at €3.4bn.

In sterling it was high yield issuance, Entertainment One priced £425m in a 7NC3 deal at 4.625%.

FOMC to stay on hold

It was a weaker session to end the week, but the market headlines will be on that Bund yield. It saw a record intraday low of -0.27% (closed -0.25%, -0.05bp), while the equivalent US Treasury yield was languishing at 2.09% (unchanged), having been as low as 2.06%.

The pullback came courtesy of a decent print in US retail sales for May of +0.5% (expectations of +0.6%, but previous month’s were revised higher), and industrial production rose by 0.4% with a revision to April’s print to -0.4% (from -0.5%).

There’s probably enough there to keep the Fed on hold this week, but the pressure is on for a cut in the late July FOMC meeting as global macro and geopolitical tensions rise.

In credit, we closed with those primary deals in the final session and with little else happening in secondary. IG closed unchanged with the iBoxx index at B+136bp, but that is still an 8bp tightening in the month and leaves the index 14bp off the tights seen at the end of April.

There’s been 14bp of tightening in the HY index this month after it closed a basis point wider on Friday B+451bp and this market for the moment is not seeing much of the follow through coming from a more volatile equity market.

At the end of last week, Turkey’s rating was cut by Moody’s to B1 from Baa3 and is now in line with S&P’s B+ assessment. As for this week, we have the FOMC meeting with the monetary policy decision due on Wednesday – with expectations for no change.

On Thursday, it’s the Bank of Japan and the Bank of England and both are expected to stay pat as well. In the UK, Boris Johnson is expected to be joined by one other candidate in the final two for the Conservative party leadership race.

So, basically, slim pickings – which means a clear run for primary and a good opportunity to get deals away before we start to wind down for the summer in a few weeks.

Have a good day.

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.