11th September 2019

Boneheads? Hmmm, quite

MARKET CLOSE:
iTraxx Main

49.6bp, unchanged

iTraxx X-Over

248.9bp, +2.4bp

🇩🇪 10 Yr Bund

-0.57%, -2bp

iBoxx Corp IG

B+126bp, +2bp

iBoxx Corp HY

B+417bp, +2bp

🇺🇸 10 Yr US T-Bond

1.74%, +4bp

🇬🇧 FTSE 100

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

More sticky plaster, please…

Negative rates are not natural and nature has a habit of expunging such aberrations. So, an ECB 20bp rate cut must be in the bag! All that’s left to ponder is whether any accompanying QE is for €15bn to calm the dissenters, or €30bn to give the markets a turbo boost.

For investors, we think it’s a case of ‘buy the rumour, sell the fact’ – or, just keep buying. For sure, if the ECB announces intentions to get involved, the recent sell-off in rate markets will be reversed and -0.75% will be back in view for the 10-year benchmark Bund yield, with -1.0% coming thereafter. The ECB will provide the catalyst/answers on Thursday.

We’re about to find out how motivated the central bank is to give the economy what might be a final push in its attempt to lift it out of the doldrums, or – at worst – it’s a case of stemming any further declines as global macro continues to slow.

As it is, we are clear on rates direction and we’re of the view that stimulus needs to come. But also, it won’t work in the long term without reforms elsewhere (at the domestic political level). All the central bank will succeed in doing is keeping things ticking over. That will most likely see those aforementioned targets being reached and quite possibly push corporate bond sector returns across the board (from IG/HY to AT1 markets) into double-digit territory for 2019.


Primary slows ahead of ECB

Primary might have slowed but we still had some good deals in the market. Top of the list was the return of Orange, the French group having lifted €2.5bn in a 3-tranche deal at the end of August. This time, they went for hybrid funding, likely motivated by the February call on another such issue. The €500m deal came in a PerpNC7.5 structure priced to yield 1.875% off a €1.4bn book and 25bp inside the opening guidance.

The other IG non-financial issue came from Worldline SA which took €500m in a 5-year at midswaps+80bp.

The day’s offerings take the IG non-financial offering for the month to €27.5bn. It’s not impossible, but we’re unlikely gong to see much or any issuance on Thursday. We might see something get away thereafter. Either way, the halfway stage for the month is just about up and we are just €7bn – €8bn away from September’s deal total being the best in years.

For the year to date, we are just a shade short of €230bn, but just €55bn away from a record year. That’s not impossible especially if the second half of September delivers somewhere on the order of €20bn with the October to early December period accounting for the rest.

Bank of Montreal was in the sterling market for £500m in a long 5-year at G+110bp, as the day’s other corporate bond deal.


Trump the warm-up act for Draghi

Trump was doing his best to influence the Fed, as his latest Twitter rant called for the “Boneheads” at the Fed to cut the rate to zero or less. They will only cut by 25bp at next week’s FOMC. However, he is just the warm-up act because Thursday it is Draghi’s show. It really feels like the market is waiting for – or wanting – something dramatic.

That Trump interjection, though, was enough to keep markets cautious and we saw no lurch higher or lower. Instead, US equities were flattish for much of the session, while in Europe, stocks managed gains of up to 1%. In addition, reports of easing US sanctions against Iran saw oil lower by over 2%.

In rates, there was a mixed bag on offer. The 10-year Gilt yield was unchanged at 0.64% and came after Scottish lawmakers ruled that the prorogation of Parliament was unlawful. There is much more to come on this story in the next few weeks.

Elsewhere, the 10-year Treasury yield moved 4bp higher to 1.74%. In the Eurozone, we had the 10-year Bund yield decline to -0.57% (-2bp) while the 10-year BTP yield dipped below 1.00% again, to 0.975% (-5bp).

Synthetic indices did very little with Main closing unchanged at 49.6bp and X-Over just 2.4bp higher at 248.9bp.

The cash market went the same way. Mind, the IG market underperformed again, with the iBoxx cash index ending 2bp wider at B+126bp, the AT1 market closed unchanged while the HY index was only 2bp wider, at B+417bp.

Have a good day.

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.