18th March 2019

Credit making hay while the sun shines

MARKET CLOSE:
iTraxx Main

59.5bp, -0.5bp

iTraxx X-Over

268.3bp, -0.2bp

🇩🇪 10 Yr Bund

0.08%, -1bp

iBoxx Corp IG

B+138.9bp, -2bp

iBoxx Corp HY

B+433.7bp, -3bp

🇺🇸 10 Yr US T-Bond

2.59%, unchanged

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (-3.68%)
🇺🇸 S&P 500

2541.47, (-2.42%)

Credit sees off any Brexit uncertainty…

We had a potentially massive few days ahead of us, but the third meaningful Brexit vote is looking increasingly unlikely that it is going ahead – and it was the most important event, in our view. The EU Council meetings on 21/22 March now comes into play in its significance as we look for any movement from the EU.

Alas, nothing there to shake the credit market. Abertis came in a 4-part deal and Telstra joined them in the IG non-financial sector. SpareBank 1, SocGen and Bankia all visited the senior non-preferred market to round out a busy day in euro-credit primary. Equities played out flat in the day, rates were mixed to better bid, sterling lost a bit of its lustre and credit spreads were tighter in a market better bid for choice. That the overall markets played out as they did was probably as much to do with the growth slowdown (Fed meeting this week) as the issues around Brexit.

The run-in to the end of this quarter promises to keep the corporate bond market in the ascendancy. There is no feeling of apathy or indigestion as the flow of deals in primary are met with huge demand, generally sees issue tighten on the break and the confidence derived from it leaves the Street with little choice but to tighten up the secondary market.

The Fed will stay pat, the BoE will too. Both will point to the more difficult macro environment amid domestic slowdowns although the UK central bank will also point to Brexit uncertainty as a reason for caution. Market rates are going nowhere but lower as fixed income revisits its 2016 moment.

It is with this in mind that investors are pouring money into the corporate bond market. The expectation is that we are going to avoid cliff-risk on macro and so we can effectively handle the slowdown we are currently in. Recall that it was only a few months ago that markets were fretting (selling off) on fears that US policy rates were heading higher in two or three moves this year.

So the impact of low rates for longer shouldn’t be underestimated in that sense. And obviously, higher beta risk has been generating the most interest and best performance to date this year. Deals are beginning to flow a little better too. For example, BNPP was in the market on Monday with a US$ Perp NC5 AT1 offering. Investors are going with the flow.


Primary sprightly

Financials first, and the trio of senior non-preferred deals came with Bankia issuing €500m in a 5-year at midswaps+85bp which was 35bp inside the initial talk and books were up at a massive €6bn. SpareBank 1 lifted €750m also in a 5-year (-15bp versus IPT) costing midswaps+55bp, with books at almost €1.7bn. Finally, SocGen printed €1.25bn in a 10-year at midswap+120bp which was also 15bp inside the opening guidance off a book just over 2x subscribed.

In non-financials, Australian telecom group Telstra issued an increased €600m 10-year at midswaps+80bp. The book was up at €4.5bn and final pricing 25bp inside the opening talk.

The big deal in the session though came from Abertis which took sterling and euro funding. The euro-denominated tranches came in a 5.25-year for €600m at midswaps+140bp, an 8.5-year for €1bn at midswaps+198bp and a 12-year for €1bn at midswaps+233bp. The deals were priced 25-27bp inside the initial guidance off total book up at a stunning €14.5bn. The £400m sterling tranche came at G+243bp for a 7-year with books up at £1.5bn. A good day’s work for the group!

For the month so far, IG non-financial issuance has risen to a sprightly €19.35bn and we are now just €8bn short of the level of issuance seen in each of January and February and for the year to date, it’s €73bn (see table below).

 


Credit spreads squeeze some more

The session petered out with equities lower for whatever reason – and one can take their pick – Brexit, growth worries, nerves regarding the Fed. The FTSE gained (+1%), but this was on the back of the weakness in sterling. The Dax closed 0.25% lower and US stocks were in and out of the red/black by small amounts during the early part of the session, before settling up to 0.25% higher, as at the time of publishing.

News of a potential delay in the vote this week in Parliament saw Gilts better bid, the 10-year yield dropping to 1.19% (-3bp), while the Bund yield in the same maturity benchmark closed at 0.08% (-1bp). US Treasuries closed to yield 2.29% (10-year, unchanged). BTP yield dropped to 2.42% after the market reopened relieved following last week’s decision by Moody’s to keep the Baa3/stable assessment on the sovereign’s rating. That’s a near 10-month low in the yield.

In credit, the indices did very little ahead of the roll and closed with main at 59.5bp (-0.5bp) and X-over at 268.bp (-0.2bp).

In cash, the squeeze continued and the iBoxx index moved another 2bp lower to B+138.9bp which is 6bp tighter for this month so far – or 34bp tighter this year. That’s 20bp more than what we had forecast for the full-year – oops indeed, although we have a long way to go still. Amazingly, returns in IG credit (iBoxx index) are up at 2.6% year to date!

In the higher beta sectors, we saw the same trend. The CoCo market squeezed as well, and the index is now at the tightest level of the year at B+558bp (-8bp) which represents a 150bp tighter since the turn of the year. Returns for this asset class? 5.4% year to date.

Finally, the high yield market was absent a deal, but it joined the tightening trend. There is now a scramble for paper while the apprehension into macro weakness seems absent, too. But it’s tighter we go amid the lowest levels of flow and volumes and there is a lack of gusto & dynamism in this market. We closed with the iBoxx index at B+433.6bp (-3bp), some 90bp tighter in 2019.

Have a good day.


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.