- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Ain’t takin’ no chances…
There is no fear in the corporate bond market. Last week’s broad macro weakness was so last week. No matter that yields and spreads are going lower in the medium term and therefore funding costs are too. Borrowers want to get their deals in now, and seemingly want to leave little to chance. They were off early to get their cash. For investors, we would think that any moderate secondary weakness doesn’t matter for the moment and will be tolerated, and the same will go for overall mid-month performance. Year-to-date after all, IG credit is showing a superlative return of 3%. That level of performance for the full-year – and most years – would be taken as an excellent result.
Using up some cash positions and rushing to get bonds on board saw to it that there was a scramble for paper in Monday’s session. And the borrowers were easier ones to understand as the likes of Airbus, Shell and AstraZeneca started proceedings in what many expect to be a heavy week of issuance. Most of the deals in the session were of lower beta ilk, but the yields were positive and one supposes better than the mattress (no yield) or cash (government bonds) – where the yields are negative.
Risk markets all started on the front foot, ignoring the weak Chinese import/export data over the weekend. After last week’s weakness, it was a case of trying to right some of the wrongs and get some of it back. There was little going to stop us. The news flow helped. Apart from that weak Chinese data and a sell-off in commodities, the surveys showed that eurozone investor confidence ticked higher, German factory orders for March were up sharply and Swiss deflation eased in April. We had some M&A in the form of Total acquiring Saft for €950m, and with it the promise of a hybrid transaction to help fund it. There have not been many of those of late. OMV in late November was the last non-financial corporate hybrid deal, and it would seem that yields have fallen enough for these transactions to work for the borrower. Risk appetite is back and investors will be clamouring for this higher yield product. A case of ‘Thank you, Mr Draghi’.
So equities initially roared higher, government bonds were anchored, oil was up on Canadian supply event risk – but later fell back in a volatile session, the credit iTraxx indices recovered a little as protection costs declined while secondary markets edged wider for choice.
Sluice gates open, longer dated issuance it is
A consequence of very low underlying fixed and swap yields is that borrowers need to print longer-dated deals in order to offer enough of a yield – they think this might be needed to get deals away. It’s no hardship. After all, who would not want to borrow (more) for longer, and cheaper. Issuers won’t be complaining. For investors, there is now a creeping trend that sees portfolios pushing out in terms of their duration. That is, more risk. The Markit iBoxx IG index now runs off a duration of 5.2 years – the highest it has ever been, and a far cry from the long-term historical average of around 4.5 years. This is a direct consequence of central bank monetary policy, QE and the ECB’s bond-grab to come.
Right now, we all benefit. Borrowers get longer-term funding at the cheapest of levels; investors are stuck with lower income streams but happy to sit on the capital gains. When it turns – we think not in 2016 – borrowers will be sitting pretty with their longer-dated funding levels, the ECB will record some losses (no big deal), but investors will be looking at some severe losses, the potential for outflows compounding their woes and ultimately leaving them “holding the baby”. We don’t see a catalyst that changes the current dynamic, and that’s a healthy reminder for us all.
The deals saw Airbus lift €1.5bn in 10-year and 15-year funding, both priced 13-15bp inside the initial price talk, so maintaining a now well-established trend. AstraZeneca’s 3-tranche deal was in 8-year, 12-year and a shorter 5-year maturity tranche. They took €2.2bn, and again all were priced 12-15bp inside IPTs. Last – but it won’t be “least” for this week – we had Shell in a 2-part offering in 8-year and 12-year maturities with pricing 15-20bp tighter than what they went out with, for a total of €1.75bn. That took the total for the session to €5.45bn of supply, or €12.45bn for the month so far.
Sun’s out and it feels good
Stocks came off their best levels for the session, but it was still a decent day. The DAX ended at just below 10,000 at 9,980 (111 points, +1.1%) having been more than 180 points higher earlier in the session, and most other eurozone indices managed 0.4-0.7% gains.
Germany’s finance minister Wolfgang Schaeuble’s pouring of cold water on the potential for a deal on debt relief for Greece was probably the reason for equities coming off their earlier highs. To us, “no deal” was always going to be the case at the emergency meeting. Oil was up 2% early-on, but was closing over 3% lower, probably succumbing to the decline in commodity prices elsewhere. Govies all over saw lower yields, the 10-year Bund at 0.12% (-2bp), for example, and the 10-year Treasury at 1.76% (-2bp).
In secondary, some slight weakness as suggested above with spreads edging a little wider but nothing to get excited about and yields on the index were unchanged as the underlying offset the weakness. In HY, the Markit iBoxx index was back up through B+500bp (at 502bp), not seen since mid-April. A good entry point. For iTraxx, they were a touch better with those better equity levels.
Have a good one. Back Wednesday.