Risk-on market sentiment and tighter credit indices

Headlines

• Risk-on market sentiment and tighter credit indices

• Euro rates down after ECB meeting despite no new easing measures being announced

• Issuers continue to print as ‘sell-side’ warns over risk-return for junk bonds

Market commentary

The markets have been in a risk-on mood this week as US, European and Asian stock markets have all trended higher. The S&P 500 reached record closes on the back of an upbeat ISM manufacturing report, signs of a labour market rebound in the ADP report and a continued dovish tone from Fed Chairman Janet Yellen, in her speech on Monday.

Benchmark treasury yields are at 10-year highs ahead of the non-farm payrolls report today. A figure around 200,000 and a decline in the unemployment rate (our expectation), should lead to further upside risks to US rates. Stronger market sentiment was also evidenced by the iTraxx Europe tightening around 6 points and the iTraxx Crossover tightening some 13 points during the week.

In the euro market, all eyes have again been on Mario Draghi and the ECB meeting on Thursday. The EONIA curve remained inverted ahead of the meeting in expectation of dovish comments from Draghi, following low inflation readings in recent months. Although no new easing measures were announced, Mario Draghi still managed to talk down EUR rates across the curve and to support peripheral government bond markets. For now, EUR rates are likely to remain within recent tight ranges with no clear direction while the ECB contemplates further easing measures. Meanwhile, low underlying rates will continue to be supportive for credits.

The market for new issues remains strong and corporates and financials continue to tap the bond market at tighter spreads. As investors continue to pour money into higheryielding assets, a number of sell-side banks and brokerages, including BNP Paribas, Citigroup, RBS and GMP Securities, have warned that yields on some junk bonds have now reached levels that no longer compensate investors for the higher risk associated with the securities (FT reports). Whether further spread compression will stabilise or revert remains to be seen, but thus far, credit markets remain in a high gear both in Europe and the Scandi markets.