18th November 2019

It’s all good, but…

MARKET CLOSE:
iTraxx Main

48.8bp, unchanged

iTraxx X-Over

232.3bp, unchanged

🇩🇪 10 Yr Bund

-0.34%, -1bp

iBoxx Corp IG

B+114.2bp, +0.7bp

iBoxx Corp HY

B+400bp, unchanged

🇺🇸 10 Yr US T-Bond

1.81%, -3bp

🇬🇧 FTSE 100

7403.92, (-0.44%)
🇩🇪 DAX

13579.33, (-0.62%)
🇺🇸 S&P 500

3337.75, (-1.05%)

… it will pay to be wary

There’s stuff getting on but it appears that the markets are relatively bulletproof as they manoeuvre  Hong Kong, ECB QE, Brexit, Trump’s impeachment hearings and so on. It’s not quite a yawn, but that list of imponderables isn’t promoting a more bearish market, which might be seen as a bit of a worry – because something might be about to blindside us.

It seems like markets are hanging on for a few more weeks before investors can clock-out for 2019 having recorded some unbelievably fantastic performance. Equities, rates, credit have all done phenomenally well which in itself is most unusual, although reconciled by the fact that these are not normal times in macro, allowing most types of investors to benefit from the mass market manipulation resulting from central bank policy over the years.

The business getting done in credit is firmly and squarely focused on primary. We had another decent chunk of borrowers in the markets again in this week’s opening session. Borrowers are not showing any hesitancy in getting some funding in, where competition holds little fear for them (pricing and size). It’s so cheap at the moment and the demand is so solid, so why not?

The deal flow took in a broad range of borrowers again including from the US and the pipeline for the next 3-4 weeks looks in very good shape. So while credit investors were busy getting their fill (or trying to), markets were displaying a sense of nervousness amid increasingly violent clashes in Hong Kong.

Trump’s impeachment proceedings continue but investors have their eye on news flow/headlines around the potential for a trade deal of some kind. The situation here seems fairly binary. And the market reaction will be too, although right now, the view is that we are going to get a ‘phase one’ deal signed.

With that, it’s risk-on, or rather, stay with it and don’t change strategy. Some chips might come off the table (in corporate credit) as some performance is locked away, but that cash will be going back into the market (in primary) when we’re back in January. High beta positioning continues to work and must be the same strategy as we start the new year.


Busy primary, what else?

LafargeHolcim got the primary ball rolling for this week. The now Swiss-domiciled borrower issued €500m in a 7-year maturity at midswaps+70bp against initial price talk of midswaps+90bp, off a book at just €1.2bn. Ford Motor Credit followed up with €500m in a 6-year at midswaps+250bp.

The other IG non-financial borrower was US chemical mid-triple-B rated company Ablemarle, which issued €500m in a 6-year at midswaps+130bp and another €500m in a 9-year at midswaps+165bp. These deals were priced 15-20bp inside the opening guidance on combined books of around €3.6bn. In sterling, Eastern Power Networks issued £250m in a 14-year at G+128bp (-17bp versus IPT, book £1.7bn).

After totting up the day’s deals, it takes the non-financial IG deal total for the year to date to a new record €296bn. That €300bn mark is surely this week’s business.

In senior financials we had Portugal’s Caixa Geral de Depositos print €500m in a 5-year senior non-preferred priced at midswaps+150bp versus initial guidance at midswaps+175bp, with books in excess of €2.5bn. Bank of Ireland issued €650m in a 6NC5 at midswaps+125bp, reducing the initial guidance by 10bp on books at just over €1bn.

As for the subordinated financial sector, Erste Group took €500m in a 10.5NC5.5 Tier 2 offering, priced at midswaps+130bp (-10bp versus IPT).

Just to tick all the boxes, Citycon Oyj issued €350m in a sub-investment grade rated hybrid offering, with the perpNC5.25 green deal priced to yield 4.5%.

The year to date HY supply level has moved to €69.3bn and we are just €5.7bn off the 2017 record level. Dare we think that possible? After all, November’s deal total has risen to over €11.6bn – easily the best November month ever.


Tepid markets

Some nerves we think given that we didn’t get anything from the US or China on the trade situation left a cautious feeling in the market. Of course, the deteriorating situation in Hong Kong isn’t helping the mood either. So equities didn’t too much, closing a small up in the UK, small down across the Eurozone’s bourses and were flattish, as at the time of writing, in the US.

In rates, it was a similar picture. Yields were barely moved across the 10-year benchmarks with Gilts at 0.73%, the Bund closed yielding -0.34% (-1bp) and in the US, the Treasury was yielding 1.81% (-3bp).

In credit, the ECB hoovered up just €966m of corporate bond debt in the last week, with the total haul rising to €181,103m (that’s after a total of 134 weeks of action). That compares with almost €2.8bn the week before that. Although much lower, it is still a significant effort.

Elsewhere in cash, it wasn’t such a busy session in secondary with investor focus obviously on primary. And we managed to edge wider for choice in IG for the fifth successive session, leaving the iBoxx IG cash index at B+114.2bp (+0.7bp).

That wasn’t the same picture for the higher beta markets, with AT1 paper better bid leaving the index edged a touch better (-4bp, to B+469bp), while the high yield market closed completely unchanged.

The synthetic indices closed with protection slightly better offered, but barely moved leaving Main at 48.8bp and X-Over at 232.3bp.

Have a good day.

Suki Mann

A 25-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 Credit Market Daily.