10th May 2017

The comeback kid

MARKET CLOSE:
FTSE 100
7,342, +41
DAX
12,749, +55
S&P 500
2,397, -2
iTraxx Main
62.3bp, -0.7bp
iTraxx X-Over Index
252.3bp, -3.4bp
10 Yr Bund
0.43%, +1bp
iBoxx Corp IG
B+114.8bp, -1.5bp 
iBoxx Corp HY Index
B+322.3bp, -5.5bp
10 Yr US T-Bond
2.40%, +2bp

Finally, something to do!

And finally, they came. We had deals galore and it’s been a while since we witnessed a day like it. There was something for everyone – well, almost – as we only failed to get a high yield borrower through the window, in euros anyway. That will come. We had high and low beta offerings in both financials and non-financials and a generally risk-on market elsewhere. The iTraxx indices saw new recent lows as the cost to insure credit dropped and the ‘feel good’ factor was evident everywhere.

Cash credit was tighter amid few flows, with the focus of investors squarely on the primary market. Equities were 0.5% or so higher while volatility has dropped (as measured by the VIX index) to over 20 year lows. Going the right way classically – but the wrong way for anyone long fixed income were government bonds, with the market slightly better offered (yields higher).

Trading the ‘event-risk’ around geopolitics has probably had its day – until the German elections in September. We can look to the next US rate hike (June?), a bigger parliamentary majority for Prime Minister May (June 8), the next batch of elections in France (in June) all with, at most, just a little injection of uncertainty. Macro is looking perkier by the day and supported by the data as the economic recovery seemingly builds on some solid foundations.

So we think that markets can go higher (equities) – valuation concerns notwithstanding, corporate bond spreads can go tighter – new issue supply levels permitting as they might be a limiting factor on how much; while government bond yields will possibly reside at the top end of their recently established ranges (10-year Bund yield around the 0.50% level).


Primary makes a comeback

Big deal: ABB with €750m

Three deals and €1.8bn from IG non-financials in the month before yesterday’s session – and then five borrowers and €2.4bn yesterday. We had ABB for €750m in 7-year funding at midswaps+30bp and taking 10bp off the initial price talk.

Repsol issued a green bond taking €500m in a 5-year deal at midswaps+35bp and some 20bp inside the opening guidance. Kellogg Co took €600m in a 5.5-year maturity offering reducing the initial guidance by 15bp to fund at midswaps+50bp.

Hella followed with a sub-benchmark €300m in a 7-year issue at midswaps+53bp and managed to price it 22bp tighter than the opening talk. Finally, WPP was in for €250m in a 3-year floater format. There was nothing there that we would think was a blockbuster issue, but investors will be relieved that we got the slew of deals.

In the sterling market, the double-B rated Saga issued £250m in a 7-year deal – the day’s only high yield rated, non-financial deal. The triple-B rated LafargeHolcim took 15-year funding for a £300m.

And then there were a couple of deals in the financials sector. Deutsche Bank issued a senior 5-year floater (size of €1.25bn) while Intesa‘s AT1 issue was the highest beta deal of the day, offering a yield of 6.25% for €750m of bonds.


Not getting carried away though…

Equities gained 0.5% or more with record levels being set in some bourses, but few were getting overly carried away by it all. That’s because the heady levels may cause some to be nervous given the stretched earnings multiples. In fact, the S&P again just failed to close above 2,400 (at 2,397, -2 in the session).

Rate markets didn’t fare too badly either with Gilts under most pressure, where the 10-year yield pushed 5bp higher to 1.20%. The 10-year US Treasury yield was 3bp higher at 2.41% – and the middle of its established 2.20 – 2.60% six-month range. Bund yields rose by just a basis point to 0.43%. OATs underperformed (for a change) as the Macron euphoria faded, the yield on the 10-year at 0.80% (3bp) and the Bund-OAT spread was up at 37bp.

In credit, secondary valuations hit news 2017 lows with the Markit iBoxx IG corporate index marked at B+114.8bp and 1.5bp tighter in the session, or 20bp tighter this year. And 17bp tighter in the last two weeks alone. The high yield market was also better bid and the index tightened to B+322.3bp (-5.5bp). We’re just a couple of basis points of tightening away from seeing levels in HY spreads last recorded in 2007. Sterling spreads moved tighter too but this market was sullied by the back-up in Gilt yields which dented returns.

Finally, the iTraxx indices hit 2-year lows with Main down at 62.3bp (-0.7bp) and X-Over at 252.3bp (-3.4bp).

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.