- by Suki Mann
iTraxx X-Over Index
10 Yr Bund
iBoxx Corp IG
iBoxx Corp HY Index
10 Yr US T-Bond
Primary bursting at the seams
In the credit market, primary again dominated with LVMH‘s four-tranche offering being the pick of the day’s deal flow. Following a weaker start to May – and that after a poor April on the new issue front – the market has got the wind in its sails and is busy making up for lost time.
Were up at over €22bn of IG non-financial issuance at just past the half way stage for the month, with senior financial supply adding in a further €13bn+. High yield has disappointed (at just €1,140m from three deals), but we look for that to correct over the next couple of weeks.
Away from the new issue market, it was a fairly subdued session for the most part – in all markets – before several equity bourses hit record intraday highs, but closed off of them. Investors were most likely perplexed at the news flow overnight from the White House and a gaffe-prone, unpredictable President Trump. While we grappled with the potential that he divulged classified information to the Russians, it was time for many to sit back and reflect, again.
There was some Eurozone data released in the form of GDP (held steady in Q1 at 0.5%, but Greece back in recession), the euro rose to $1.10, rate markets were largely unchanged and equities were generally a little lower. The UK’s FTSE though, was setting a new record closing high, just as UK inflation hit its highest level in four years at 2.7%.
We see little in the levels of supply to trouble valuations in the secondary market. Low flows and volumes amid a still very supportive fundamental background usually leave the secondary market sidelined when primary is so effusive. Spreads will more likely come under pressure if we get a broad risk-off environment, and not necessarily reprice when we are hit with high levels of primary activity. They were flat in yesterday’s session after over €7bn of IG non-financial issuance, for example.
Anything you can do…
LVMH can do better. After two three-tranche deals on Tuesday from AB InBev (in sterling) and E.ON (in euros), Louis Vuitton trumped them both as the luxury brands group followed up with a four-tranche deal raising €4.5bn to help fund the acquisition of Christian Dior Couture. The issues met with huge demand and allowed the borrower to tighten up pricing across the fixed tranches (short dated floater and fixed 3, 5 and 7-year maturities) by 18-20bp.
Deutsche Telekom added €750m to the day’s issuance with a quick fire nine-year maturity deal at midswaps+50bp (only 5bp inside the opening price talk). Finally, for investment grade non-financials, IBM paid a visit and took 8 and 12-year funding for a combined €2bn – and both tranches 18-20bp inside initial guidance.
Overall, that was a very good session from the primary markets and €7,250m was raised, taking the total for the month to date to €22.45bn. We’re on target for €30bn or more for the month which will go someway to addressing the poor issuance (less than €6bn) in April and helping to absorb some of the oodles of sidelined cash.
The session’s high yield, non-financial contribution came from Rallye – the French holding company issuing an increased €350m in a long 5-year, priced to yield 4.375% versus the initial talk of 5%. Yield, it is still in demand – no matter the quality of the borrower!
Financial issuance came from Wells Fargo (€1.5bn), BFCM (€1.25bn) and Groupe Bruxelles Lambert (€500m), while Hoist Kredit took €80m in T2 funding.
In the sovereign space, the tap of the 2057 Gilt for £5bn elicited record orders of £26bn. Some of it is technical, but there’s obviously little risk aversion to UK debt markets based on that level of demand alone. The same goes for France where a sale of €7bn, 30-year OATs had orders of €31bn and no doubt the headline writers will put it down to it being a massive endorsement to the election of a new president.
A day for breaking records
Stocks didn’t necessarily roar higher and the US indices did come off their record intraday highs. While the FTSE index did the same, it did manage to close at a new record buoyed by sterling weakness. Equities are in remarkable shape, and there’s little noticeable willing in changing strategies as investors keep their allocations fairly stable. There could be a bit of nervousness around the level of stock markets/valuations that suggests some wariness to do so. Anyway, whatever the reason, higher stocks are keeping the broader sentiment upbeat and investors in risk-on mode.
Government bond markets were little changed in the session. Gilt yields were at 1.14% (10-year) while the equivalent maturity Bund closed out to yield 0.43% (unchanged) with a 45bp spread versus OATs.
And then there was the secondary corporate bond market. Really, all eyes were on primary after that big session of issuance, and we wedged a little wider for choice with the Markit iBoxx index for IG credit at B+115.4bp (+0.4bp). The size of that mark wider suggests an obligatory mark wider by the Street! Sterling credit also edged a tad wider amid no corporate bond supply, but with a clear focus on the Gilt tap.
Finally, the high yield market, the cash index closed a basis point better at B+318bp. The Rallye deal generated enough excitement and probably made sure that sentiment was positive towards the asset class. The cash markets have plenty of legs in them yet. The iTraxx indices were left to reflect the broader markets upbeat sentiment and Main closed at 61.9bp (-0.4bp) with X-Over below 250bp at 249bp (-4bp).
Have a good day.
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