24th June 2019

Bandwagon rolls on

MARKET CLOSE:
iTraxx Main

54.2bp, +0.5bp

iTraxx X-Over

256.8bp, +2bp

🇩🇪 10 Yr Bund

-0.30%, -2bp

iBoxx Corp IG

B+125bp, unchanged 

iBoxx Corp HY

B+420.5bp, +3bp

🇺🇸 10 Yr US T-Bond

2.02%, -5bp

🇬🇧 FTSE 100 6095.41, (+0.76%) 🇩🇪 DAX 12633.71, (+1.15%) 🇺🇸 S&P 500 3185.04, (+1.05%)

Opportunity to jump on…

We’re in bandwagon territory, but few are neither advocating or thinking of getting off it. In fact, the thinking is that there is more to go and there’s a quite a scramble to get on board. Equities are close on 20% higher this year, fixed income in its safest form has given almost 6% and even Bitcoin is up at or near $11k a coin. Not bad. Government bonds are in uncharted territory from a yield perspective, but they are no longer viewed as interest-bearing instruments. The price is going up and that’s what motivates the investment now.

The next fixed income instrument in the pecking order, however, takes in the corporate bond market and it is on course to deliver its best performance since 2016 (when IG returned 5%, HY 11%). IG has already easily bettered that 5% year to date, although we do have a full six months to go in which much could go wrong.

Overriding it all is that we have a good inkling that the ECB will soon be in action (QE) and into that, it should serve to continue the squeeze in spreads. There is every opportunity that we close this week/first half with the IG iBoxx cash index at its tightest level for 2019 having corrected the severe widening seen in May. There’s only 4bp to go.

Lower down the food chain, the high yield market is gaining a few friends now. There has been much reluctance to get involved in any heavy-handed way. But after a slow start, external technicals are beginning to see a firm bid return. This month, spreads (iBoxx) have tightened 50bp. This year, they are 108bp tighter and have just 27bp to go before they see those 2019 tights.

High yield primary has been decent and is on target for €60bn for the full-year (€28bn currently, €62bn last year), but it hasn’t weighed on secondary at all. A significant part of the returning bid has come recently and it is no coincidence that talk of an ECB QE programme has tied in with it. Previous crowding out of IG markets forcing them into the high yield market is fresh in the mind.

Whether we can turn the 7.5% performance YTD that comes in the high yield market into double figures by year-end will depend almost entirely, on the ECB enacting a QE programme.  We think.


Primary’s financial flavour

There was a financials sector flavour to the day’s deals in Primary. SEB kicked us off as it issued €1bn in a 5-year senior preferred at midwaps+30bp (-15bp versus IPT), followed by Nykredit Realkredit’s €500m of senior non-preffereds in a 5.5-year at midswaps+88bp (-17bp versus IPT). SocGen offered up €750m in a 7-year non-preferred deal at midswaps+95bp (-15bp versus IPT).

Elsewhere, French insurer UMG Groupe VYV issued €500m in a 10-year at midswaps+150bp (-25bp versus the initial talk), real estate group Klepierre lifted €600m in an 11-year at midswaps+45bp (-25bp versus IPT) and In’Li issued an inaugural €500m in a 10-year at midswaps+95bp (-35bp versus the opening guidance).

As for the non-financial IG offerings, Dutch utility Enexis printed €500m at midswaps+43bp in a 12-year maturity, with books up at €3.5bn and 27bp lopped off the initial guidance. US advertising group Omnicom took €1bn in a dual-tranche deal, split equally between an 8-year tranche at midswaps+78bp (-27bp versus IPT) and a 12-year transaction at midswaps+108bp (-27bp versus IPT).

€500m deal for the Spanish multinational broadband and telecommunications provider

Telefonica priced a 20-year, €500m deal at midswaps+128bp (which was just 12bp inside the opening talk.

Those last three mentioned deals took the IG non-financial deal total for the month to €29.2bn (see chart, below) and with more deals to come this week, we’re going to close the month with it being the best one this year (€30.7 in March) and quite possibly the best June since 2014 (€34.5bn the target).


Some good news… and Trump

The news flow for the session was actually a little brighter, for a change. We had tensions lowered a bit in the US/Iran situation with news over the past few days that Trump had pulled back from a military strike. Unfortunately, with more US economic sanctions, lessening tensions generally seemed to have been a missed opportunity.

We did have Trump’s latest tweet-volley against the Fed as he vented his misgivings on the Fed’s ability to call the market, suggesting they ‘blew it’ and that interest rate cuts were needed as US policy was effectively behind the curve.

Reports emerged that the EC had pulled back from enacting disciplinary measures against Italy regarding the sovereign’s excessive debt, thereby allowing the coalition government time to reach an acceptable budget deal.

And then we had that election re-run victory for the opposition mayoral candidate in Turkey, the opposition winning back control of Istanbul after 25 years, and representing a serious a knock to Erdogan’s authority. That’s probably short-term good news anyway – and that’s how the markets chose to view it.

More generally, we’re facing a lighter week on the data front and all eyes will be on that G20 summit in Japan at the end of the week, which should therefore see us through to the end of the first quarter with performance at around these levels.

As for the market, European stocks were up to 0.6% lower in a lacklustre session, and US ones flattish, as at the time of writing, and all seemingly in wait and see mode regards the G20. It could be a long week.

In rates, the market was better bid though. We were left with the 10-year Benchmark yields as thus: Bunds -0.31% (-3bp), Treasuries 2.02% (-5bp) and Gilts 0.81% (-3bp). BTPs didn’t outperform though on report of that EC enquiry delay, left to yield 2.16% and unchanged.

In credit, the synthetic market went in the same way as the equity markets and wider but in very limited fashion. That meant iTraxx Main was 0.5bp higher at 54.2bp and X-Over just 2bp higher at 256.8bp.

The cash market had the day’s better-than-expected deal flow to look at, but even though the secondary market is a little more technical now versus synthetics it didn’t manage to tighten and we closed effectively unchanged across the board. The iBoxx IG cash index closed at B+125bp and the HY index at B+420.5bp (+3bp).

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.