23rd October 2017

Credit market buzzing

iTraxx Main

54.5bp, -0.5bp

iTraxx X-Over

238.9bp, -2.6bp

10 Yr Bund

0.43%, -2bp

iBoxx Corp IG

B+102.5bp, +0.3bp

iBoxx Corp HY

B+263.8bp, unchanged

10 Yr US T-Bond

2.37%, -1bp

FTSE 100


S&P 500


Steady on, old boy…

That’s more like it. A decent level of issuance, tighter spreads, Japanese politics having a greater influence versus Spanish ones and rising equities. We’re into the final few sessions of the month and should be closing it on the front foot for risk. The ECB press conference on Thursday will curtail activity that day and most likely for Friday, so it is about making the most of the sessions before it. Verizon wasted no time, having indicated a move in the European capital markets last week with a four-tranche euro/sterling effort, backed up by Procter & Gamble, Danone and RCI Banque all combining to give the investment grade investor base something to get their hands on, in a month which has otherwise failed to deliver.

In the credit markets, we’re in (or approaching) record-breaking territory for most of the sectors of it. Yet few are overly concerned and are content to lift in primary and watch the ECB keep it all together in IG secondary, while the high yield and CoCo bond markets take all the performance glory. It might seem like that there is little choice but to go with the flow – if nothing else for fear of being left behind – even after the superlative performances most will have managed to have locked away this year.

But, we can see a situation where being long and going longer is the right trade to do. Rates are staying low for a long while yet, macro is supportive, corporate credit metrics are improving, the default rate remains low and money is still flowing into the asset class. There is no sign of rotation (credit to equity). This year’s performance from all the different asset classes has been excellent and that will just garner more inflows as investors chase more of those declining returns. There’s a turning point somewhere, we just can’t see it at the moment.

The Catalonia referendum has been brushed aside for the moment and seen from a global perspective as a ‘domestic’ issue now. The EU will be relieved, but we are going to have periods where the struggle for independence commands the attention of a wider audience. There are stirrings though in the Czech Republic (potentially new anti-establishment PM in coalition government) and a couple of ‘referenda’ in Italian regions looking for more autonomy. They will barely impact the markets but the political stirrings of discontent across the continent have substance.

IG issuance back with a flurry

Verizon printed big deals in sterling and euros

Ahead of the market expected to quieten down once the ECB meeting starts later this week, we had deals galore to help absorb some of that heavy cash held with IG investors. Danone took €1.25bn in a hybrid PNC5.6 structure but with only a 1.75% coupon – not that that deterred anyone, as they still lopped 50bp off the cost versus the initial guidance. RCI Banque issued €500m in floating format for an unusually longer 7-year maturity at Euribor+57bp (-18bp versus IPT). The double-A rated Procter & Gamble delivered two tranches for a combined €1bn at a miserly midswaps+8bp in a 7-year deal and midswaps+20bp in a 12-year transaction – which were a massive 22bp and 20bp tighter than the initial guidance, respectively.

The session’s biggie though came from Verizon which printed in sterling for £1bn at Gilts+165bp (19-year maturity), but also a three-part euro-denominated deal for a combined, huge €3.5bn. The three deals were finally priced at midswaps+65bp (9-year), midswaps+90bp (12-year) and midswaps+145bp (20-year) with the various tranches priced 15-20bp inside the initial guidances.

The other deal of note in the session was a €150m tap from high yield borrower Vallourec of its 2022 issue. However, Wind Tre’s opening pricing gambit was released and we look forward to the multi-deal transaction’s final pricing this week and in the process, taking the high yield market’s issuance for the year to a record.

With that, and all of a sudden, the numbers for supply for the month in IG non-financials are beginning to look respectable as well. It takes the total for the month to €17.25bn but is still some way short of the €26bn seen last year, although the total YTD is now up at €227bn and suddenly that €250bn full-year headline figure comes into view.

ECB weekly purchases decline

The ECB reported that the latest week’s purchases of non-financial corporate debt came in at €1,300m versus €1718m in the prior week. That’s the lowest level of weekly purchases for two months. Still, given the state of secondary market liquidity and lack of primary issuance, it is still a disproportionately solid effort.

And it is small wonder spreads in IG are continuing to grind tighter, just a handful of basis points (as measured by the Markit iBoxx index) away from record lows.

ECB Weekly Purchases

The total purchases to date, after 72 weeks of market participation and intervention, stand at €119,457m with the long-term weekly average purchases edging a touch lower to €1,669m. The ECB owns 17% of the eligible market (of around €700bn).

Mixed session to start the week

Stock markets spent most of the session in the black but faded most of any of the rally. That was Europe’s story while in the US, the markets opened to see new record highs before they faded the intraday’s best levels. Government bond markets also did very little with yields in the benchmark 10-year area slightly lower, for choice. The 10-year Bund was yielding 0.43% (-2bp), US Treasuries 2.37% (-1.5bp) while Spanish government bond risk closed a tad weaker with Bonos yielding 1.64% (+1bp).

In credit, no nagging doubts where the indices were concerned with the cost of protection falling. Main was down at 54.5bp (-0.5bp) and X-Over at 238.9bp (-2.6bp).

The confidence in the risk proxies was met with a more mixed bad in the cash market. IG effectively closed unchanged with the Markit iBoxx index at B+102.5bp (+0.3bp), while the better bid for higher yielding debt saw to it that CoCos were slightly higher in price and the index level fell to B+406bp (-5bp) and is just 5bp off the record tight. The CoCo index yield crunched to a new record low of 3.74% (-6bp). And finally, in the high yield market, a quiet session made sure we closed completely unchanged (index at B+263.8bp).

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.