24th January 2019

Back with a vengeance

MARKET CLOSE:
iTraxx Main

76.8bp, -0.9bp

iTraxx X-Over

329.4bp, -1.8bp

🇩🇪 10 Yr Bund

0.18%, -5bp

iBoxx Corp IG

B+168.8bp, -0.5bp

iBoxx Corp HY

B+502bp, +2bp

🇺🇸 10 Yr US T-Bond

2.71%, -4bp

🇬🇧 FTSE 100 6144.25, (+1.26%) 🇩🇪 DAX 11657.69, (+1.33%) 🇺🇸 S&P 500 3036.13, (+0.74%)

Primary going some, and some more…

Thursday was deal day

The ECB meeting had absolutely no impact on the credit primary market in a surprising session which saw over €8bn of IG non-financial deals. Most likely taking the view that the central bank wasn’t going to change anything apart from being more dovish – which is what happened – borrowers flooded the IG vanilla corporate market with deals.

It was a stern effort and will take the month’s primary corporate bond deal flow to much more respectable levels. And there was juice in the deals, with another hybrid in there as well – the third this year. Overall, it was a stunning session in primary and pushed the ECB meeting/press conference into the background as far as corporate bond market investors were concerned.

Front end/belly of the curve like maturities, cheap as chips, ECB-meeting insensitive, multi-tranche and, although through its banking subsidiary, there was no hiding from the fact that Volkswagen was back hoovering up significant funding. And we needed it like a hole in the head.

Volkswagen: Back again

The borrower got the blame for the credit market’s weakness through November and December after a €4bn+ multi-tranche offering which exhibited all (and more) of the aforementioned criteria.

No doubt this effort will be a stark reminder that we are going to need to proceed with caution as these types of deals manage to have a detrimental effect on spread performance. Back then, the VW Bank curve was repriced by 60bp and the initial pricing of this new set of deals had them 25bp – 45bp cheap across the curve. We would think that secondary curve repricing will be more limited given the movement in the final pricing (-18bp).

Better lots of single tranche (at a stretch dual tranche deals) as pricing is better controlled with issuers not having to pay up for size. The repricing impact is also thus less limited. But do borrowers care? Probably not, well VW certainly doesn’t.


VW hoarding it, but trumped by IBM

The details: VW came with a €300m 3.5-year floater at Euribor+147bp, followed by fixed deals in a 3.5-year maturity for €500m at midswaps+137bp, a 5-year at midswaps+172bp (€850m) and a €850m 7.5-year at midswaps+207bp. The final pricing was only 18bp tighter than the initial guidance across the tranches, with the combined books up at over €9.5bn for the €2.5bn of issuance.

IBM were not to be outdone

And then IBM piped up with a blockbusting 4-tranche, €5bn effort of its own! The US giant lifted debt from across 4-year to 12-year maturities. They issued a 4-year €1.75m at midswaps+45bp, 6-year paper at midswaps+70bp for €1bn, an 8-year €1.5bn at midswaps+80bp and a 12-year €1.25bn tranche at midswaps+95bp. The final books were undisclosed but the final pricing was 20bp – 30bp tighter across the tranches.

It didn’t end there. Accor took 7-year money costing midswaps+140bp for €600m (-20bp versus IPT, books around €3bn), and took the day’s IG non-financial deal total to a massive €8.1bn – almost €23bn for the month so far which already eclipses January 2018’s effort.

Accor followed up with a sub-investment grade rated €500m PNC5.25 hybrid priced to yield 4.5%. A book at over €2bn saw that final yield 25bp lower than the initial guidance.

The deal of the day? The risk appetite is there and Banco Commercial Portugues’ €400m PNC5 AT1 issue gets it. The bank went out with a 9.5% coupon (not the highest ever – Portugal’s Caixa Geral gets that honor with its 10.75% coupon – but eye-watering nevertheless), and after some decent interest suggesting that there is some very good risk appetite out there, they got their booty which finally cost them 9.25%.


But macro in decline having barely recovered

The early data in the session reported that German industry experienced contraction as seen through the country’s manufacturing PMI (less than 50 in January), while for the Eurozone as a whole came it in at 50.7 (51.1 in December). France’s private sector, generally slowing but holding up well, also slipped further into contraction with PMIs coming in at 47.5 for January (49 in December).

The incoming macro data is showing that the economy is worsening at a greater pace. That situation should not be lost on May/Barnier/EU governments where some sort of yielding on the Irish backstop needs to be adhered to, or worsening macro (mostly China-led) will see an even greater decline in the European economy. The ECB took note.

The central bank kept it all unchanged with the benchmark rate at 0%, deposit rate at -0.4% and an expectation that reinvestment of maturing bonds purchased under the QE programme well past the date when it starts raising interest rates. The was no new TLTRO as some had expected while the balance of risks to the Eurozone had ‘moved to the downside’, according to Draghi. The press conference didn’t change much apart from seeing the Dax lose some steam and fade earlier gains – before rising again to end around 0.5% higher for the session.

In rates, the earlier better bid for the Bund was underpinned, the yield on the 10-year at 0.18% (-5bp), while Brexit jitters saw Gilts rally to yield 1.26% (-6bp, 10-year) and US Treasuries followed suit as they gained support to yield 2.71% (-4bp).

As for credit, the synthetic indices were slightly better offered (lower) and Main closed down at 76.8bp (-0.9bp) while X-Over edged lower to 329.4bp (-1.8bp).

In the cash market, understandably, cash was extremely quiet as the focus was on that plethora of issuance in primary. Still, we managed to edge tighter for choice and the IG iBoxx cash index was 0.5bp tighter at B+168.8bp with good performance in the CoCo market as the index moved 12bp tighter to B+632bp. The big drop in the underlying helped yields in both markets drop and returns doubly boosted.

The high yield market didn’t do much save for being marked wider, with the index finally 2bp wider at B+502bp although returns rose as the underlying rallied more.

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.