23rd May 2018

Bad hair day

MARKET CLOSE:
iTraxx Main

61.6bp, +2.1bp

iTraxx X-Over

286.4bp, +7.1bp

🇩🇪 10 Yr Bund

0.51%, -5bp

iBoxx Corp IG

B+119.2bp, +5bp

iBoxx Corp HY

B+356bp, +14bp

🇺🇸 10 Yr US T-Bond

3.02%, -4bp

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Credit throws in the towel…

The corporate bond market has just about everything going for it from both a fundamental credit perspective (low defaults, Goldilocks economy, low rates, spreads not at record tights, low levels of transformational M&A and so on) and a technical one. The latter has investors sitting on plenty of cash amid the most unexpected low levels of new deals.

There’s a bit of M&A in the air but nothing transformational or systemic that we need to be worried about it. Re-leveraging is not a problem, while the ability for the corporate sector to service its ongoing obligations remains intact at the best levels ever – even as average credit quality across the corporate IG sector (for example) has dropped from AA (1980s/1990s) to triple-B.

But we were greeted with yet another IG borrower (after Bertelsmann) failing to get a deal away inside a week, citing ‘deteriorating market conditions'(!) That’s like taking one’s ball away because they couldn’t get the same tight pricing others have before them. Pay up, it’s simple.

Anyway, it was Whirlpool EMEA SpA, a private company, but part of (and guaranteed by) the Whirlpool Corp group failing to get enough interest to justify going ahead with a 10-year, expected €500m issue at midswaps+100bp. That was after going out with an unchanged ‘final spread’ of midswaps+100bp – while Bertelsmann went out with ‘final terms’ before pulling out last week.

There’s something amiss and we’re sure syndicate desks will be scrambling around with their pricing calculators, having misread the mood of the markets twice in quick succession, and left with some serious egg on their faces. That is, pricing expectations will need to change as we suggested in a previous note. A new issue premium against a seriously manipulated secondary curve – especially so in the case of infrequent borrowers – is becoming an inaccurate and ineffecient pricing tool, and a better method is needed in the price discovery process for these type of infrequent borrowers.

Innogy nevertheless duly delivered its well-flagged, hard-marketed deal. The group took €500m in a 4.5-year at midswaps+50bp (-10bp versus IPT) and the same amount in an 8-year at midswaps+85bp (-5bp versus IPT) on combined books of around €2.2bn. So a quieter session on the corporate front, but still €1bn to contend with for investors although the big headlines will be around the pulling of the Whirlpool transaction. In financials, Sydbank issued €100m in an AT1 PNC7.25 structure at 5.25%. Senior financials were filled with a €350m deal from Mitsubishi UFG in a 5-year floater format.

And IG spreads are nowhere near record levels. The tightest level we had on the iBoxx IG cash index was B+82bp recorded in early February. Since then, we have seen a fairly consistent widening in IG spreads to B+114bp now (+18bp year to date). Yet the ECB is still lifting circa €1bn of IG debt from an extremely illiquid secondary market each week, new issue supply levels are running at around 30% below last year’s run rate and nothing has changed – as suggested above, in credit fundamentals. Rate markets are not selling off hard – far from it of late. Yields are not shooting to the moon, where 0.80 – 1.00% for the 10-year Bund yield come year-end was close to market consensus. We’re at half of that level now.

A bid for corporate bonds should work here, but it isn’t. Indeed, the daily directionality in spreads between IG and HY seems to have lost some correlation. The high yield corporate bond index has widened by 60bp since January (B+342bp now) and is 90bp off the tights recorded in November 2017. Here though, the run rate of issuance for the first five months is running way ahead of last year’s for the corresponding period.

However, looking at it more closely, while we have had more deals the weakness has largely come in sessions when there has been less issuance! We would think that it has become a little more difficult for investors to stomach the level of the market in secondary, but feel much more comfortable to huddle with the herd in primary.


Eurozone economic gloom confirmed

Gloom continued across the manufacturing sector in the Eurozone. The raft of data continues to spell it out and there is no point in expecting, wishing or anticipating that we’re going to see a material recovery in, say, the second half. There’s growth but it continues to slow as evidenced by a raft of PMIs across the region (and the Eurozone as a whole) came in well below expectations. In addition,UK inflation (CPI) fell in April to 2.4% against expectations that it would remain unchanged at 2.5% (March), while the core rate fell to 2.1% from 2.3% (in March). Sterling fell to 2018 lows versus the dollar – off by almost 1% in the session.

It’s all further evidence (weak manufacturing too) for the MPC that a rate rise the market had been anticipating at its next meeting on August 2nd is going to be extremely difficult to justify. We don’t think that the BoE will move on rates this side of 2019.

As for the US, Trump has been taking some flak from his own party for trying to rescue China’s ZTE, while at the same time he has voiced concerns about the terms of the trade deal – and that it might need altering. In addition, the President escalated his attacks on the Mueller enquiry, this time on reports that the FBO had planted a spy within his presidential campaign. Obviously, the markets opened in defensive fashion.

Anyone who went bottom-fishing BTPs and other Italian debt into Tuesday’s session will have been burned a little after Wednesday as prices declined again. Equities were lower everywhere, but Italian stocks were underperforming – especially its banking sector. Renewed fears on the bad loan situation within the Italian banking system and how the new coalition (once confirmed) will handle them injected more fear into the sector.

Rate markets were generally better bid, and yields declined significantly except for Italian risk where BTPs in 10-years were backed up yielding as much as 2.45% while the Bund yield dropped to as low as 0.50% in the session. Last week, the 10-year Bund was yielding as much as 0.63%.

The front end is also better bid with the 5-year now yielding -0.13% and the 2-year -0.62% – both between 8-13bp lower in the past month. The ECB has a dilemma now as we head into the next crucial meeting (July 20th) where the markets expect an announcement on the QE purchases amid expectations that the central bank will reduce their monthly purchases further (from €30bn currently) to perhaps €15bn. And then completely stop soon after (March 2019?).

It’s all up in the air now- and usually, we would think that such a situation encompassing low growth, low rates, low yields, low defaults would be supportive for credit, as highlighted above. That was the situation for much of the 2009 – 2017 period.


Govt bond prices up, equities down, credit spreads wider

Tuesday’s respite session ended with a bang. The macro news flow being on the weaker side again, and particularly so in Wednesday’s session, saw to it that rate markets got the bid that they deserved. Yields fell sharply. In the UK, 10-year benchmark Gilt yields fell to 1.44% (-8bp), the equivalent maturity Bund traded most of the session at 0.50% (-6bp) while even Treasury yields dropped 5bp to 3.01% (10 year). Italy, as suggested earlier, was the underperformer, the 10-year BTP some 8bp higher in yield at 2.40% having seen 2.45% earlier in the day.

In equities, the screens were a sea of red. The FTSE dropped by 1.1% with losses accelerating as the session progressed, the DAX 1.5% and the Italian market by 1.3%. The US opened lower too, sustaining losses of around 0.5% (at the time of writing).

As for secondary credit, weakness again. Italian banks were wider, IG generally felt heavy and the high yield market was also feeling the heat. the Markit iBoxx IG index was up 5bp (!) to B+119.2bp. the CoCo index was beaten-up too, 23bp higher at B+450bp (+160bp off the January tights). The sterling corporate market also widened, by 4bp to G+151bp, with the pace of widening actually much, much slower than the euro-denominated market – and actually outperforming of late. As for high yield, the euro-denominated iBoxx index was up at B+356bp – 14bp higher. What else?

As if to complete the rout for risk assets, the iTraxx indices were higher too. iTraxx Main was up at 61.6bp (+2.1bp) at the close and X-Over up at 286.4bp (+7.1bp).

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.