16th January 2018

You’ll never guess

MARKET CLOSE:
iTraxx Main

44.5bp, -0.3bp

iTraxx X-Over

230.8bp, -0.3bp

10 Yr Bund

0.56%, -3bp

iBoxx Corp IG

B+90.2bp, unchanged

iBoxx Corp HY

B+274bp, +0.8bp

10 Yr US T-Bond

2.54%, -1bp

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″]

The outlook is brightening…

After Monday’s US holiday-enforced lighter session, we revved up some in Tuesday’s session, although at the open it felt like we were working through a fairly labour-intensive session. And then the US opened, and equities burst into action as we recorded new intraday highs for stocks.

In fixed income, there were deals with sovereigns in particular catching the eye, and we traded through the day with a tone which remained upbeat. It was led by those US equity markets, while duration also got bit of a boost (US yield curve flattest since the crisis began). Crypto alone is having a more difficult time of it. Stirrings in Germany, where the SPD’s Berlin branch voted against forming a grand coalition with the CDU/CSU helped the better bid for Bunds, while in the UK December’s inflation rate eased to 3% from 3.1% in November – and Gilts caught a slight bid.

The daily slew of covered bonds continued, we had a couple of IG non-financial corporate and senior bank issues, nothing in high yield and a couple of sovereigns and other SSA issuers in the primary market. Cash remained better bid, flows light and volumes limited and the cost of protection dropped a little too. Outside of that, we’re in a holding pattern waiting for a catalyst to push markets higher with some of the same euphoria with which we were greeted at the beginning of the year.

Until then, it is a grind tighter in spreads across all the different corporate bond sectors. And equities will gain their main directional bias from US stocks, with the earnings season about to get into full swing over the next two to three weeks.

It’s all good, though. Even if risk asset prices are not ratcheting higher like they did in the opening couple of weeks, or that we had a couple of sessions where the news flow has been more balanced. Overall, the outlook is bright. And brightening. The US, Eurozone, China and other parts of Asia are growing in unison. Manufacturing activity is on the up, corporate investment is rising, consumers are spending – and all this while the central banks are starting to put the brakes on their overly exuberant decade long policy accommodation. Meanwhile, the US tax reform fiscal boost has barely been felt.

Crash, bang, wallop? Sure, the vagaries of any normal economic cycle will automatically see to that. There is trouble ahead, the flattening of the yield curve is telling us that. But not yet. And likely not in 2018.


Primary still churning out the deals

Belgium issued €5bn

In the senior banking sector, we had deals from BNP (5-year, €500m FRN at Euribor+33bp) and Society Generale (7-year, €1.25bn at midswaps+52bp) totalling a combined €1.75bn, and both in senior non-preferred format.

This sector has been particularly active in these opening few weeks, and the total senior issuance has risen to €16.35bn. January is typically a heavy month for senior issuance (last year saw €21bn) and January 2015 over €40bn). We’re on course for close on €30bn given the current run rate.

For the IG non-financial sector, Thales printed €500m in a 7-year maturity at midswaps+23bp, knocking 12bp off the initial guidance and off a book which was a little over €1.3bn. The other issue in the day came from Gas Natural Fenosa as it lifted €850m in 10-year funding at midswaps+67bp, or 13bp inside the initial price talk and garnered a book of around €2.3bn. These deals took the non-financial issuance total for the month so far, to €15.5bn.

The sovereign issuance – a theme for this month – took in Sweden’s €4bn long 5-year (books over €7bn) and Belgium’s €5bn long 10-year (books over €20bn), priced at midswaps-27bp and mid swaps-17bp, respectively.


…and more records, of course

German equities outperformed in Europe, up 0.3% and fading earlier strong index gains of 1%. It was no coincidence that EUR/USD slipped back to trade off a low 1.22-handle to help facilitate that rise. Sterling was a little weaker too, but the UK equity markets were more concerned with the fallout of the Carillion collapse. In the US, we saw 28,000 for the Dow, 2,600 for the S&P as all their main indices reached new intraday record highs – before they also faded most or all of the gains most likely on the news which emerged that Steve Bannon had been subpoenaed to testify in the Mueller investigation. The Dow was at 24,000 less than two months ago (end November)!

On the earnings front, GE took a $6bn charge on its legacy insurance portfolio, Ford was looking to make savings across all areas of its business and GM forecast that full-year 2017 results would be at the upper end of expectations while performance would ‘stall out’ in 2018. Citigroup took a non-cash charge of $22bn (!) as a result of the recent tax reforms.

In rate markets, yields on 10-year Gilts declined modestly to 1.31% (-2bp), Bunds to 0.56% (-3bp) and US Treasuries were a basis point lower at the close, yielding 2.54%.

The day’s action in credit had iTraxx Main lower by just the smallest of margins, with Main at 44.5bp (-0.3bp) and X-Over at 230.8bp (-0.3bp).

In the cash market, we had a very limited session in secondary yet again, with spreads unchanged. That left the IG Markit iBoxx index at B+90.2bp (still a record low). Nevertheless, the CoCo market squeezed some more – actually much more – and we saw the index drop a massive 10bp to a fresh record tight of B+315bp, while the index yield also declined fell to a record low of 3.03%.

We need a deal. The index has returned 1.8% already in these opening two and a half weeks of the year. Again, the banking sectors’ recovery alongside the demand for a perceived higher yielding ‘gimme’ asset, is seeing the sector effectively bid only.

In sterling, we’re still devoid an IG non-financial deal this year, and the market squeezed some more, down at a fresh post crisis tight of G+123.5bp (-0.5bp). Finally, the high yield market was probably better offered for choice, the index closing at B+274bp (+0.8bp).

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.