4th November 2019

🗞️ Plain sailing surely, into year end

MARKET CLOSE:
iTraxx Main

48.7bp, -1.3bp

iTraxx X-Over

226.7bp, -5.7bp

🇩🇪 10 Yr Bund

-0.35%, +3bp

iBoxx Corp IG

B+111.7bp, -1.5bp

iBoxx Corp HY

B+397.6bp, -6bp

🇺🇸 10 Yr US T-Bond

1.78%, +5bp

🇬🇧 FTSE 100 6076.60, (-2.29%) 🇩🇪 DAX 11586.85, (-1.65%) 🇺🇸 S&P 500 3044.31, (+0.48%)

Pulling in one direction…

Now is the time to hang in there and see it out. Markets are rallying, few should be looking to bail. The going is good. November has got off to a fine start and we might just see the risk markets rise throughout the month, before coming to a more measured close through December.

It’s not plain sailing, there is no macro recovery, not even a whiff of one even after some mixed data from the US (factory orders missed, declining by 0.6% in September, being the latest). Yet the broad mood is improving and it’s on trade – not least because Trump needs a deal with the Chinese. That is going to see us over the line with equities having added over 20% this year and fixed income across the board with total return performance of 7% or more.

As if to highlight the lack of a recovery in macro, the German manufacturing PMI for October came in at 42.1 which was better than the 41.9 forecast and ahead also of September’s 41.7. Nevertheless, it’s still an awful number with the sector deep in contraction territory adding to the view that the economy will have recorded a technical recession, to be confirmed when we get the GDP number next week. For the Eurozone as a whole, the PMI for the sector came in at 45.9 (against expectations and a previous reading of 45.7).

After the big rise in US stocks on Friday, which saw the S&P close at a record high, we followed higher in Europe with investors buoyed by the positive noises coming from the US and China about the trade talks with hopes of a ‘phase 1’ agreement being signed very soon. European equities rose to their highest levels in almost two years (Dax well over 1%), rate markets edged lower though (yields higher), credit squeezed some and we had several deals in primary to open the account for the week.


Reverse Yankee issue holds court

Harley Davidson: Up shortly

It wasn’t the busiest of sessions in primary, but we did have Colgate Palmolive become the latest US borrower to tap the euro-denominated debt markets. US-domiciled borrowers Harley-Davidson and Boston Scientific are up next and likely this week’s business.

Anyway, Colgate-Palmolive issued €1bn in an equally split no-grow transaction, in a 2-year and 10-year maturity priced at midswaps+15bp and midswaps+55bp, respectively. Both tranches were priced 25bp inside the opening guidance levels.

This was the sole IG non-financial offering in the session in euros, given we did have Daimler back in the market (lifted €4bn last week) but this time for £350m in a 5-year priced at G+125bp (-10bp versus IPT).

So, we added €1bn of IG non-financial issuance to the counter, taking us up to €279bn for the year to date, and now just €6bn shy of the annual record €285bn (2009). US borrowers account for 30.4% of this market this year so far (a record level), with German-domiciled corporate borrowers in second place at 19.8% and French issuers next up, representing 18.7%.

IG Deals by country for 2019

In senior financials, OP Corporate Bank issued €500m in a no-grow 10-year senior non-preferred at midswaps+68bp, while SEB also went for senior non-preferred funding for €1bn at midswaps+60bp (-20bp versus IPT).


A record a day

Increasing market expectations of that trade deal made for new records in US stocks, while the 1.35% rise in the Dax had German equities pushing hard to try to reach their own records (now just 3% off the high). There is talk now that Trump needs a deal, so he might just acquiesce his biggest demands and get something on the table he can present as a ‘win’ to his electorate.

The earnings season in the US seems like it has surprised to the upside, while there have been only a few clangers in Europe. Confidence is good.

Risk-on usually means rates come under pressure. And they did. The 10-year yield on the Bund rose to -0.35% +3bp), the Treasury to 1.78% (+5bp) and the Gilt to 0.72% (+5bp). This will eat into returns for investors but anything in excess of 7% come year-end for 2019 (Eurozone government bonds) and one must be happy with that.

The big move in equities helped to push the cost of credit protection lower. The market was clearly better offered and iTraxx Main moved to 48.7bp (-1.3bp) with X-Over recording a drop of 5.7bp to 226.7bp.

In the secondary corporate bond cash market, we’re squeezing towards that B+100bp level on the IG iBoxx index. We’re now at B+111.7bp (-1.5bp in the session) and that’s the biggest daily move since early October. For the year to date, we’re 61bp tighter in IG spreads on this index.

As we might expect, higher beta credit gets greater attention on a solid up day. So after an up and down couple of weeks, the AT1 market was back to a more decisive tightening dynamic for this week’s opening session, leaving the index 10bp tighter at B+450bp (-160bp this year). Finally, in the high yield market, amid the meagre flows and volumes, the squeeze saw the index 6bp tighter at B+397.6bp.

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.