20th February 2018

Answers on a postcard, please

MARKET CLOSE:
iTraxx Main

52.4bp, +0.4bp

iTraxx X-Over

267.6bp, +3.3bp

10 Yr Bund

0.73%, unchanged

iBoxx Corp IG

B+87.25bp, +0.5bp

iBoxx Corp HY

B+298bp, +3.5bp

10 Yr US T-Bond

2.91%, +3bp

FTSE 100 , DAX , S&P 500 ,

Tick tock…

The corporate bond market still seems shell-shocked from the volatility of a couple of weeks ago as it fails to offer anything to really get its teeth into. Secondary is dull across the board, there’s little by way of event-risk with the sector to get concerned about and primary is just throwing up odd deals, as non-financial borrowers remain largely on the sidelines.

It can’t simply be a case of ‘Let’s get February out of the way’. We know that the demand for risk is there, the markets are clearly receptive in this case. Spreads have been remarkably stable, relatively, which highlights the lack of a willingness to sell in haste at the first sign of trouble. And then the usual around macro is supportive and the earnings season is mostly behind us. We should be getting on with it.

In a sense, we did get on with it – and while the deal flow was decent, it wasn’t the kind of primary market that corporate bond market investors would necessarily have got excited about.

Spain’s benchmark issue rightly took most of the headlines as it took over €25bn in orders for a 30-year deal. French real estate group Mercialys was also in the market while French car leasing group ALD SA was the other ‘corporate’ borrower. Commerzbank slipped in with a senior offering, too. Non-financials? Nowhere to be seen.

And that means just €9bn of issuance so far this month from IG non-financials and hardly a deal since the end of the first week of the month. It’s also the lowest level of February non-financial IG issuance since the euro currency came into inception. One would be forgiven in thinking that we were in the midst of a financial markets crisis!

With the ECB still in IG corporate bond acquisition mode, lifting an average €5-6bn per month, we are likely going to continue to squeeze tighter in spreads, across the board. Equity market stability and recovery will help even if we do get some days where they close in the red. It’s the big moves which matter.

So the ECB is extracting copious amounts of liquidity from the secondary market, which is helping with pricing stability but also maintaining spread market valuations at or around record tight levels. Few are daring to sell anything unless a holding is super rich – and then the ECB is the back stop bid. Otherwise, we hang on to what we’ve got, and wait for IG corporate primary to re-ignite to get those cash levels invested.

That now looks like a short wait, until March.


Viva la España dominates primary

The sovereign nation took a massive €6bn in 30-year funding at midswaps+105bp, having taken 10-year money in a mega deal (over €40bn of orders) in January. The latest deal was finally priced 4bp inside the opening guidance. In financials, Commerzbank issued €500m in a 10-year senior deal at the wider end of the revised guidance at midswaps+82bp – and is not the first borrower of late to have seen this kind of pushback.

Elsewhere, Mercialys took just €300m in an 8-year maturity at midswaps+87bp (-13bp versus IPT) and ALD €800m in a 3-year floater at Euribor+34bp (-11bp versus the mid 40s opening guidance).


Weak US open, but fighting back

Walmart missed and sullied the mood a little, although Home Depot’s more upbeat report helped offset that some. Equities in Europe moved into the black, though probably because the euro weakened a touch versus the dollar. US equities opened weaker and tried to make a fight of it in the session, narrowing their losses for the most part and closing mixed across the indices. Bitcoin, for its part, was up again as it continues to make a recovery, now at $11,500 per coin.

In rates, the US 10-year Treasury yield rose to 2.91% (+3bp), the Bund yield was unchanged at 0.735% and Gilt yields in the 10-year benchmark declined to 1.58% (-2bp).

As for the credit synthetic market, costs to protect credit leaked wider with Main up at 52.4bp and X-over 3.3bp higher at 267.6bp.

Curiously, the cash market didn’t outperform synthetics as it did on Monday, with the market a touch better offered for choice. Flows and volumes were, of course, extremely light. The Markit iBoxx IG cash index edged 0.5bp wider to B+87.25bp while even the CoCo index moved 15bp wider to B+335bp. IG sterling corporate markets are displaying similar daily directional trends to the euro markets, the index at G+133bp, which was  basis point wider in the session and 15bp off the recent tights seen two weeks ago.

In the high yield market, and given the aforementioned IG moves, the index closed at B+298bp (+3.5bp).

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.