16th January 2019

Change in the air…Not

MARKET CLOSE:
iTraxx Main

78.1bp, -2.6bp

iTraxx X-Over

326.6bp, -7.2bp

🇩🇪 10 Yr Bund

0.22%, +2bp

iBoxx Corp IG

B+174.8bp, -3bp

iBoxx Corp HY

B+505bp, -11bp

🇺🇸 10 Yr US T-Bond

2.73%, +2bp

🇬🇧 FTSE 100 6104.73, (+1.71%) 🇩🇪 DAX 13066.54, (+2.36%) 🇺🇸 S&P 500 3431.28, (+0.67%)

The status quo won’t cut it…

BoE Governor Mark Carney

The BoE’s Carney was again doing his best to talk up the benefits of no Brexit after that humiliating vote on Tuesday, but that we expect from the establishment. No one knows where this will lead to, but on we go. May’s agreed deal with the EU spectacularly failed the Westminster test, just as we expected.

On Wednesday she won her vote of no confidence, also as expected. The EU has thus far refused to budge and extend any kind of an olive branch. They will only be judged as being good negotiators if they manage to eventually get a deal close to the one currently agreed. Anything else, because of ‘the process’, stubbornness and/or a failure to yield might ultimately have severe repercussions for the EU (we think economic and existential risks even). The markets didn’t really react though save for a bit of volatility around sterling, which will have passed most by. The concern for most remains global macro.

So that big drop in new car registrations in December (-8.4% after -8% in November) doesn’t bode well on the demand front from such an economically important industrial sector and suggests we are in for an extended period of economic weakness.

The US equity markets seem to be roaring along for the most part and while the wheels of the equity market rally haven’t quite come off in Europe, there a little more hesitancy about the equity market here of late. Those auto numbers will weigh on Eurozone stocks given the importance of the sector, while the next jumbo corporate bond offering (if we get one) will hold fear for investors.

The rot set in after Volkswagen launched its jumbo deal (€4.25bn, 4-tranches) last November, from which we have never really recovered. Cheap it was, massively repriced secondary it did – and the rest had to follow. Investors remain fearful, but can’t position for it and so remain sidelined ion secondary for the most part.

Against the recent trend, credit was back – across the board! After some initial weakness in IG spreads in the opening sessions of the year – surprising given the rise in equities, we seem to have established a holding level and now some recovery, while investors are positioning with some higher beta (subordinated bank debt) risk which appears to have widened too much – and where the yields on offer too good to pass. As we have suggested in previous notes – and so has our banking analyst, 7%+ yields on solid SIFI AT1 paper are a worthy proposition/position to have. 


Senior financials day

Wednesday was financials day in primary and BNPP was busy filling its boots in euro and sterling currencies as it lifted considerable size. The euro-denominated tranche was in the form of an 8NC7 senior preferred structure for €2.25bn at midswaps+180bp, off a €10bn order book and was priced 20bp inside the opening guidance. The bank followed with a £1bn, 7-year maturity senior non-proffered deal at G+225bp which was 15bp inside the initial talk and off a £2.5bn order book.

The other offerings came from Bank of New Zealand for a €500m print in a 3.25-year at midswaps+78bp (-17bp versus IPT, €2bn of interest) and RBC went for a 2-year floater format, for €500m costing them at Euribor+38bp.

That was it on a fairly quiet session in corporate primary, with only FedEx and Enel (combined €1.64bn) being this week’s IG non-financial offerings, so far.


Cash credit charges, finally!

We had some brighter news on the US earnings front, with Goldman Sachs and BofA both managing to top expectations for their quarterly earnings to remove some of the gloom which had beset the sector after results earlier in the week disappointed from Wells Fargo, Citi and JP Morgan.

That certainly kept US markets in positive territory, even if they looked a little tired and they offered support to the European bourses too. European bourses rose by 0.3% or so, while a sterling rally dimmed the lure of the FTSE stocks and it was alone in the red, by around 0.5%. Gilt yields rose, 5bp higher to 1.31% in the 10-year, the Bund yield backed up 2bp as well at 0.22% in the same maturity, while Treasuries rounded off the session also 2bp higher, to yield 2.73%.

The synthetic markets saw hedges coming off. Equities might have moved by only a small amount higher, but index continues to rally and costs to protect credit risk continues to fall. iTraxx Main dropped again as it closed at 78.1bp (-2.6bp) while X-over was down at 326.6bp (-7.2bp). Since the start of the year, the synthetic indices have outperformed cash with Main around 10bp lower and X-Over 30bp tighter.

Nevertheless, the IG market recorded its best day of the year so far, and the index squeezed 3bp tighter to close at B+174.8bp. The high yield market managed a good squeeze too, leaving the index 11bp tighter at B+505bp (-11bp), while the bid for AT1 risk left that index 23bp tighter – 60bp tighter now this year. Some exuberance at last!

Have a good day.


For information about our bespoke portfolio risk service, click here

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.