30th October 2018

Be afraid

MARKET CLOSE:
iTraxx Main

76.0bp, +0.6bp

iTraxx X-Over

302.5bp, +2bp

🇩🇪 10 Yr Bund

0.37%, -1bp

iBoxx Corp IG

B+146.6bp, +1.2bp

iBoxx Corp HY

B+438.6bp, unchanged

🇺🇸 10 Yr US T-Bond

3.11%, +2bp

🇬🇧 FTSE 100

6,947.92, -36.90
🇩🇪 DAX

11066.41, -178.13
🇺🇸 S&P 500

2641.89, +2.46

And not just because it’s Halloween…

Rallies are all too often becoming false dawns, leaving us to genuinely believe we could be at an inflection point for the markets. That means there will be no theme until we get some better clues as to where we are going. Treading water is a well-known survival technique until a ship arrives. It is eerily quiet in the corporate bond market resulting in volumes and confidence at rock bottom levels, with sentiment impacted by the huge levels of intra-day volatility in equities.

And it is affecting us in every way. For example, primary market activity and volumes have hit a wall. We can imagine that syndicates/treasurers are having a multitude of go/no-go calls where the net result is ‘no-go’ because pricing targets fail to reflect the more difficult market conditions, but also where the latter refuses to readjust to something which might be seen as being less fanciful. In that sense, borrowers need to understand better that a new normal is approaching.

Any pricing advantages issuers gained after 30 months of spread/pricing manipulation is about to end, the QE clock is running down. 

In the secondary market, over the course of the QE programme – and if we measure from a wider market perspective – the IG iBoxx cash index is actually flat at B+145bp (since June 1 2016). Interestingly, the index yield is 14bp higher at 1.45%. It was in Q1 this year we saw record low spreads on this index of B+81bp while the record low index yield came in September 2016 at 0.83%. Low funding costs as seen over the past few years are a thing of the past for borrowers. But are tighter spreads also necessarily a thing of the past?

We wouldn’t necessarily think it is the case, but it looks extremely difficult from here to see spreads tighten say 15bp – on an index basis. The odds are that we will grind wider. There are just too many moving parts which impact spreads. We will need higher equities, a decent amount of primary activity to generate some confidence and interest in the market, macro stability and a sustainable resumption growth (outside of the US) and reduced levels of geopolitical risks. None of those look like playing their part for a positive spread story. When we add in the end of QE come year-end, the spread market will be fending for itself in 2019.

It’s going to get interesting.


Primary shelves need stacking

Primary drew another blank in the session and we’re closing the month with this market massively in the doldrums. For the month, IG non-financial issuance has come in at just €10.6bn, the lowest level for an October since 2012 – and the second lowest month of issuance this year. There were just 12 borrowers in the market, and, were it not for the three triple tranche opportunistic deals from VW, Diageo and P&G, we would have been looking at the worst month of the year. August’s issuance was just €7.5bn, which is not bad for a holiday month.

For the year so far, the ten months of 2018 have offered €187bn of issuance and it is well off the pace set since 2014. Versus last year, for example, issuance for the corresponding period was up at €227bn. Now November can be – and usually is – a heavy month for deals, the 2014-2017 period seeing an average of €32bn.

However, given the current state of the market and the reluctance of borrowers to pull the trigger on funding, we can reasonably expect issuance to miss that November average seen in recent years. December barely offers much more than €5bn – €10bn, so we are probably looking for a full year IG deal total of around €205bn – €210bn. (€265bn in 2017).

The high yield market has delivered €4.3bn of deals in October, which compares unfavourably with the €13.7bn of deals in October last year. Only six borrowers were in the market. For the year to the end of October we have seen €60bn of euro-denominated issuance and already it is the second-best year on record for the HY market in Europe.

Last year’s record €75bn issuance looks like it will stand for at least another year given that the final two months of the year are unlikely going to set the market alight. November in 2017 saw €10bn of issuance, but conditions were much more stable then. We ought to be looking in the context of €65bn – €70bn for the full year of 2018.

As for the senior bank sector, five banks were in the market for just €2.85bn versus €8bn printed in the corresponding month last year. The year to date total stands at a rather gloomy €115bn and we shouldn’t think that much more than €130bn will see out the total for the year. In 2017, it was €135bn against €145bn in 2016.


Good riddance to October

The penultimate session of the month passed as a bit of a damp squib amid mixed levels of news flow. We took in Q3 Italian GDP which came in at 0% as the economy stalled (which was no surprise, given the political turmoil) and might have some further repercussions regarding budgetary expectations, as the standoff with the EU polarises some more. The 10-year BTP yields rose 14bp to 3.49%.

The earnings results were a little better than of late as the likes of BP, Fiat and Coca-Cola beat expectations, although markets were contending with another dividend cut from GE (to just 1c per share) amid a $22bn non-cash write down. In the UK, October retail sales fell more than expected while the wider implications of Monday’s budget were being digested.

As mentioned earlier, it seemed like the markets were parked up, waiting for a catalyst to get moving. The US equity market opened in sprightly fashion, up around 0.9% and looking in good form. But we’ve been here before – and all too often of late. That was soon faded before recovering again as we endured another rollercoaster ride. Small wonder borrowers are fearful of pulling the trigger on a new deal (as highlighted above). The intraday volatility is just too much at the moment.

Anyway, at the time of writing, the S&P was up 0.5%. The Dax closed 0.4% lower, the FTSE flat and Italian stocks 0.2% lower. In the rate market, it was also a case of treading water nd we saw little movement as the 10-year yield on the Bund edged to 0.37% (-1bp) the US Treasury to 3.11% (+2bp) and Gilts were unchanged at left at a 1.40% yield.

In credit, the synthetic market was a touch better bid (wider), the iTraxx Main index left at 76bp (+0.6bp) and the X-Over index at 302.5bp (+2bp), highlighting and indicative of the uncertainty. For cash, the IG market was again a touch better offered, and the index edged to B+146.6bp (+1.2bp) which represents a 16bp move wider this month (!), and total returns of -0.2% in October. Not bad. The sterling market closed unchanged with the index left B+165.2bp and just 9bp wider this month. The rally in Gilts leaves total return for the month at +0.9%. Not bad either.

The high yield market closed completely unchanged, leaving the index at B+438.6bp, representing a widening of 50bp in October, on the back of total returns at -1% for the month.

Have a good day.


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

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.