11th May 2016

If you can’t beat ’em, join ’em

MARKET CLOSE:
FTSE 100
6,157, +38
DAX
10,045, +65
S&P 500
2,084, +26
iTraxx Main
76bp, -2.5bp
iTraxx X-Over Index
323bp, -6bp
10 Yr Bund
0.12%, -2bp
iBoxx Corp IG
B+145bp, +1.2bp 
iBoxx Corp HY Index
B+502bp, +4bp
10 Yr US T-Bond
1.76%, +1bp

Boldly going where…

swiss-alps

Turning Swiss: Euro credit markets

It’s not rocket science. The euro-denominated European corporate debt market is going the same way as the Swissi one. We had a 3-tranche transaction yesterday from Eli Lily in Swiss Francs which offered yields of -0.15% (2-year), 0.145% (8-year) and 0.45% (12-year). Admittedly, the negative yield was for the very front-end, but what about the 14.5bp basis points fixed for 8-years? There have to be better places for ones cash! Anyway, that maturity would normally be on the cusp of appealing to retail players in that market, but they’re going to take it. The Swiss capital markets have been this way for a very long time given the preponderance of retail money, but we’re soon going to be joining them. It’s been a theme in euros ever since the ECB declared their hand, and soon enough we will get a borrower print in a short maturity with a negative yield. We will be paying that issuer for the privilege of holding its debt, and hope for a continued squeeze to make sure we get a capital gain out of doing so. New territory for non-Swissi investors.

When might this happen? Well, we might not necessarily be going tighter every day in spreads, but corporate bond yields are anchored or going lower (Markit iBoxx IG index yield at 12-month low of 1.28%). All we need is a bund curve where paper up to medium maturities stays at these negative yield levels, where a scarcity of bonds might see them go even lower (the ECB’s purchase programme has been increased after all), and then we could be just weeks or at most months away before someone chances their arm.

We had another very good session primary on Tuesday, but with a higher beta feel to the deals. That means a little more yield was on offer. CNH gave us the first HY deal of the week, while IG corporate supply came from ENI, Abertis, Kellogg, Simon Property and Pernod.

Better tone, monthly record in sight

That quintet of borrowers added €4.35bn to the IG non-financial supply total. One can feel the excitement and the sentiment is certainly very upbeat even if deals are not necessarily breaking tighter. Monday’s slew of deals, for example, were mostly a touch wider than their reoffer levels. The issuance yesterday took this week’s (2-day) running total to €9.8bn and past the €7bn that was issued last week. It’s €16.8bn for the month so far. Once again we find ourselves looking at an assault on some kind of a monthly issuance record. The best May for IG issuance was 2009, when some €39bn was issued, according to data supplied by Dealogic.

mapfre

Mapfre: Senior Financial Issuance

The clamour to get deals done is intensifying with a plethora of borrowers lining up or showing off their wares on the road. We would think therefore that new supply will pass that previous high and that this month will set a new record for any May month. And the issuing dynamics stay the same. Go out with a cheap initial price indication, build a decent book and then ratchet in the pricing. That is, 10-20bp of tightening versus IPTs is still the norm.

Senior financial issuance came from Mapfre, AXA and NAB for a combined €3.25bn and one of the heaviest financials issuance days for several weeks. In the HY market, CNH paid 3% for 7-years in a €500m lift.

Promising start, but…

There was a very good start to the session once again, with stocks roaring higher, only to hit a brick wall. And then we had a bit of a turn around and they eventually ended off their session highs. The early news flow wasn’t great with German industrial production for March crashing 1.3% while its trade surplus hit record levels, leaving much food for thought on both counts. France also saw industrial production decline by 0.8% Y-O-Y in the same month and this was the country’s worst monthly drop for a couple of years.

On the plus side, Chinese data suggested that April consumer prices held steady while producer prices declined, but by less than expected. Eventually, we were left the DAX 0.7% higher and most other bourses up by around the same amount. US equities were up strongly too. Oil prices saw the commodity cosying up to almost $45 per barrel again (Brent).

Bund yields continued to decline and the 10-year was back down at 12bp, leaving many thinking “0.047%”. That’s the historic low on the 10-year bund. Just to think, three of four weeks or so ago, we went from around 7bp to a heady 31bp. The 10-year Gilt yield was down at 1.40%, seeing 1.66% not too long ago (and 1.24% not too long before that!).

In secondary credit, spreads edged a little wider such the Markit iBoxx IG index was up at B+145bp in a broad’ish retreat, while the better bid for the underlying (government bonds) helped the index yield to stay unchanged at 1.28%. In HY, it was a similar story but the weakness was extremely moderate, the index left higher at just B+502bp (+4bp).

That’s it, all hands to the primary-market pump again. Have a good Wednesday.

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.