12th February 2020

🗞️ Another one bites the dust

MARKET CLOSE:
iTraxx Main

41.7bp, -0.6bp

iTraxx X-Over

210.1bp, -0.4bp

🇩🇪 10 Yr Bund

-0.38%, +1bp

iBoxx Corp IG

B+101.4bp, -0.6bp

iBoxx Corp HY

B+331.5bp, -4.5bp

🇺🇸 10 Yr US T-Bond

1.63%, +4bp

🇬🇧 FTSE 100 6001.89, (-0.19%) 🇩🇪 DAX 12764.80, (-0.51%) 🇺🇸 S&P 500 3397.16, (+0.34%)

If you can’t beat ’em, join ’em…

Lord over them, admire them or just join them, because we ain’t going to beat them. The ability of the markets to swat aside any number of risk-events which might ordinarily have derailed them has been fantastic.

Indeed, it looks as though investors have taken the view that the spread of Covid-19 won’t be a Black Swan event. We’re going to need something spectacular now for that to be the case. The doomsayers have once again, seemingly got it wrong. Crisis averted.

Markets are trading on that assumption. Event-risk is sooo yesterday. We have record highs being set across many equity markets. Corporate bonds (in developed markets anyway) have held resolute throughout.

And we have a rate market generally on the defensive (relatively better bid), just in case – but also reflecting the non-trivial probability of policy action as Q1 economic weakness threatens to spill over in Q2.

However, it’s not quite a case of ‘crisis over’, but there is little point in pushing back against the current tide. 3,500 and 30,000 on the S&P and Dow indices are in sight, and any push to those levels is going to see corporate bond spreads (in Europe) back at, or close to, record tights as well.

Primary is getting busier following the odd hiccup besetting equities this year. Volatility in equities has failed to dent secondary valuations while demand for paper in primary has been massive.

In Wednesday’s session, we witnessed some massive levels of demand for higher-yielding subordinated deals – all the way down to the triple-C rated area.

The great interest in Piraeus Bank’s T2 offering is either a punt (even if properly researched or otherwise) or just a cheap deal too good to turn down. This deal came hot on the heels of the Alpha Bank issue from last week (€500m, 10NC5 sub, 4.25% yield and similar rating, with books 10x and final pricing -75bp versus IPT). The Eurozone/periphery’s banking sector must be in good shape.


Hybrid flavour for primary

As suggested, the session was noticeable for the hybrid (and subordinated debt) issuance coming from both the non-financial corporate and banking sectors. There’s a bit more yield on offer from these deals, it’s relatively cheap equity for the borrower shoring up balance sheet credit strength, while investors are grateful for the incremental yield being offered.

The markets were going some – and some more – funding Greece’s Piraeus Bank, as that borrower issued €500m 10NC5 Tier 2 subordinated debt with a yield of 5.5% and with books up at a massive €4bn (final pricing -50bp versus IPT). This is a Caa3/CCC rated offering!

We’re not sure of that deal was topped or not by the AT&T hybrid deal, but the US borrower issued €2bn of a PerpNC5 deal priced to yield 2.873%. Books were not disclosed but would have been substantial given that final pricing was 50bp inside the opening gambit. AT&T becomes the fourth telecoms group to issue euro-denominated hybrid debt this year.

Straying with the hybrid/sub-debt theme, UniCredit lifted €1.25bn of a PerpNC7.3 AT1 structure with a 3.875% coupon, with books here also at a staggeringly high level in excess €9bn, and final pricing a huge 75bp inside the opening talk.

There were other deals. BNP Paribas issued €1.25bn of a senior non-preferred 8NC7 at midswaps+73bp (-17bp versus IPT). We had Iceland’s Lansforsakringar Bank print €500m of senior preferred at midswaps+45bp for 5-years, and Swedish group Landsbankinn HF take €300m in a 4.25-year at midswaps+83bp (-27bp versus IPT).

First Abu Dhabi Bank printed £450m in a 3-year at G+98bp.


Weak macro confirmed but equities rally, rates stable

There were no eyebrows raised on the Eurozone’s industrial production data print which showed that activity in the sector fell by 2.1% in December versus the previous month, or by 4.1% in the year. We would think that any hopes of a recovery in January (and February) will have been dampened by the Covid-19 outbreak.

On Friday, we get Q4 GDP for the Eurozone and Germany – and it isn’t going to be pretty. Equities might be at record highs in that Dax index, but there is a reluctance to reduce Bund holdings. That must be because of macro fears as well as the potential for further central bank action if the quarter plays out badly.

The 10-year benchmark Bund yield was a touch higher at -0.38% (+1bp), the Treasury yield rose to 1.63% (+4bp) and the Gilts was yielding 0.60% (+3bp) – all modest moves in comparison to the level of equities.

The Dax was up 0.9% (saw a record high in the session), the FTSE added 0.5% and most other European markets were up to 0.6% for the good. US markets ended off the record highs as we closed Tuesday, but they were having another tilt at them on Wednesday.

In credit, spreads are also following the path of least resistance but only managing to grind tighter. That was evident across the synthetic space, with iTraxx Main just 0.6bp tighter at 41.7bp and X-over barely moved at 210.1bp (-0.4bp).

In the cash market, of course, that squeeze was felt in the cash market as well and there wasn’t too much by way of activity. The focus was on the primary deals.

As such, the IG iBoxx cash index closed at 101.4bp (-0.6bp) and the AT1 index was 8bp tighter at B+331bp. As for high yield, the same. The index closed at B+331.5bp, 4.5bp tighter.

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.