19th June 2019

About turn!

MARKET CLOSE:
iTraxx Main

55bp, -1.5bp

iTraxx X-Over

256.3bp, -4.5bp

🇩🇪 10 Yr Bund

-0.285%, +4bp

iBoxx Corp IG

B+130bp, -4.5bp

iBoxx Corp HY

B+434bp, -14bp

🇺🇸 10 Yr US T-Bond

2.05%, -1bp

🇬🇧 FTSE 100 6049.62, (-1.73%) 🇩🇪 DAX 12489.46, (-0.04%) 🇺🇸 S&P 500 3152.05, (-0.65%)

Cold’ish Turkey moment…

After the huge excitement generating rallies across all markets, the comedown. Time for some respite and reflection before we no doubt have another frenzied period where rates rally, equities push-on on the back of easier central bank policy and credit spreads tighten even as borrowers flood the markets with deals.

Against the odds, it’s been an excellent opening half of the year for the fixed income markets as rates and corporate credit sit on the most impressive of performances. The quality-end of the market has generated total returns of around 6%, for example. The AT1 market, a stunning 9.6%! Elsewhere, despite the trade fears and the weakness of the domestic manufacturing sector – and a fair dose of market volatility, the Dax hasn’t done too badly, returning 17% year to date!

The primary market has exceeded all expectations too but given the decline in borrowing costs, we ought not to be too surprised. IG non-financial issuance at €155bn has set us up for somewhere in the region of €250bn for the full-year – against our earlier pitch of just €200bn. The volume this month – with still a week of business to go – comes in at €27bn and is €8bn shy of being the best June since 2014. Senior financial issuance has also been heavier than we might have expected and at €92bn has the market on course for somewhere in the region of €160bn.

The high yield market has offered a bit of a mixed bag. Our initial thoughts were for €45bn of issuance for 2019, but we are already at €29bn and the pipeline is quite heavy. Declining borrowing costs at the level we have seen ought to have seen a higher level of issuance, but market volatility (equities) has affected the willingness of investors to chase new deals.

That said, now the expectations of QE have risen, we might see some renewed vigour for the asset class and the crowding out impact (and lower IG juice) might push IG investors towards HY again. €60bn for the full-year is not an impossible target (€62bn last year).

The market waited for the FOMC to conclude its current meeting and was treading water into it, although we got several deals on the screens in what looks like the final session for it this week, given that several European jurisdictions will be closed on Thursday as they observe Corpus Christi.


Primary thins, but still dealing

€750m deal for Heidelberg’s multinational building materials company

HeidelbergCement managed to garner a book of around €6bn for its €750m long 8-year deal and they priced it 35bp inside the opening guidance at midswaps+115bp. Ahold Delhaize lifted €600m in a 6-year sustainable bond offering priced at midswaps+50bp. The deal was 30bp inside the opening guidance off a book 8x subscribed. Indigo Group SAS took €100m in a tap of the 1.625% 2028s at midswaps+105bp. America Movil completed the IG non-financial line up in the session, with €1bn in an 8-year at midswaps+73bp (-27bp inside IPT).

The most interesting deal, though, was elsewhere. Greece’s Piraeus Group took advantage of the excellent market conditions with a testing and increased €400m 10NC5 T2 offering which was set with a 9.25% coupon (-50bp versus IPT). The triple-C rated borrower attracted orders in excess of €850m and was taking advantage of the current aggressive drop in market yields but also the massive rally in its stock price this year amid several asset divestments as part of its turnaround plan. One supposes that there is a feel-good factor around the institution.

Finally, worth a mention was the €1bn offering from Serbia, which issued in a 10-year at midswaps+140bp and took 35bp off the initial guidance, from an order book of €6.4bn.


Calmer waters awaiting the Fed

With the Fed in view, the markets were treading water and resisting any major moves. After the big moves on Tuesday, that was probably about right. So we closed with equities close to flat in the session. On the data front, UK manufacturing orders dropped to their lowest level in 3 years and CPI dropped back to 2% in May with the underlying trend suggesting some weakness.

In rates, we saw a back up in the market, the euphoria of the previous session failing to see prices hold. The 10-year Gilt yield rose to 0.86% (+6bp), the equivalent maturity Bund yield moved 4bp higher to -0.285%.

Interestingly, in a likely manoeuvre for the top job, the Bundesbank’s Jens Weidmann dropped his well-known opposition to the central bank’s bond-buying operation, suggesting that Outright Monetary Transactions was within the ECB’s mandate, as determined by the ECJ. So Draghi’s succession/policies will be seamless once he has left his role, in October, in a move that bodes well for the market’s expectation that we have little opposition to a new QE effort.

And then came the Fed. As expected, rates were left unchanged BUT suggested rate cuts in the future on the back of rising uncertainties in the economic outlook. ‘Patience’ is out of the window in a more dovish stance. We had a moderate US equity rally in the immediate aftermath of the decision. The bond market was also circumspect given there was some doubt, we think, as to whether a cut will come at the next meeting. The 10-year, as at the time of writing was yielding 2.05% (-1bp).

Before that, iTraxx Main closed 1.5bp lower at 55bp and X-Over 4.5bp lower at 256.3bp as the risks surrounding the credit markets have seemingly receded.

In the cash market, we continued to squeeze tighter. There was obvious focus on the new issue market but it was a lighter session although that didn’t necessarily mean volumes picked up in the secondary market. They didn’t. Nevertheless, the iBoxx IG cash index tightened by 4.5bp to B+130bp with a massive squeeze in spreads serving to highlight the follow-through to the asset class form the crunch lower in government bond yields.

The iBoxx IG cash index yield is now at a record low of 0.82% and IG returns YTD have jumped to 5%. The IG sterling market has returned 7%.

The AT1 market is out in front though as the grab for yield has benefited the sector. The AT1 iBoxx index spread is now at B+525bp (-25bp on Wednesday) – and the best level this year, some 185bp tighter. Total returns jumped too, to a massive 9.6% year to date!

The high yield market might not have had a deal, and flows were light but we got a significant squeeze in spreads. Market liquidity is busted, and the Street is reluctant to let much paper go. The iBoxx index tightened by 14bp to B+434bp (30bp this month). Returns year to date? 6.8%

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.