10th September 2019

Credit takes a much-needed breather

MARKET CLOSE:
iTraxx Main

49.4bp, +1.5bp

iTraxx X-Over

246.5bp, +7.5bp

🇩🇪 10 Yr Bund

-0.56%, +2bp

iBoxx Corp IG

B+124bp, +1bp

iBoxx Corp HY

B+415bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, +7bp

🇬🇧 FTSE 100

7324.17, (-0.80%)
🇩🇪 DAX

13253.75, (-0.38%)
🇺🇸 S&P 500

3096.63, (-0.05%)

Primary market respite appreciated…

Finally some respite from the September daily deluge of IG non-financial corporate bond deals. And it probably helped stave off a deeper bout of indigestion after having seen €26bn printed in this month’s seven trading sessions. There were deals but nothing like the massive volumes seen since we returned after the summer. We don’t think that the market has run out of steam and can expect a resumption in issuance at likely heavy levels once we are through Thursday’s ECB meeting.

It feels rather dull when primary slows, but it’s a necessary requirement if we’re going to greet high levels of deals without seeing a material widening in secondary and/or lower subscription levels, followed by good performance when issues are free to trade. After all, demand and performance combine to promotes confidence.

Even if the majority of September’s deals are wider in secondary, we seem to have it just right at the moment. We took a relative breather on Tuesday but we know that there is still plenty of sidelined cash waiting to get invested in this market. The ECB will be the catalyst, most likely, for the next leg of the issuance phase.

It might just provide the tonic for secondary spreads to tighten as well – because they haven’t moved much this month. Although that’s a positive given the welter of primary deals, we’re anticipating more than a grind come next week if the central bank restarts corporate bond purchases as part of any QE.

Equity weakness in early August saw spreads widen as well, but markets have been treading water since. In September the IG iBoxx cash index is just 4bp wider, the AT1 index is 17bp tighter while the HY index is 11bp tighter. It’s no coincidence that the AT1 and HY markets have barely seen any deals.


Primary slows, but still dishing out the goodies

So primary slowed, markedly. But again, there was something in all three corporate bond markets with a little more in the high yield one. We had LyondellBasell in IG non-financials lift €1bn in an equally split dual-tranche deal. The 7-year leg came at midswaps+127bp while the 12-year transacted at midswaps+175bp. The deals were priced 13-15bp tighter than the initial guidance.

They were followed by EDP’s €600m, 7-year green issue priced at midswaps+77bp (-23bp versus IPT). The combined total of €1.6bn was the second lowest daily level of issuance this month.

For high yield, Intrum printed an upsized €850m in an 8NC3 structure priced to yield 3% while Matterhorn Telecom issued €250m of 5NC2 debt at 2.625% and €575m of 7NC3 debt at 3.125%.

Senior financials were dealt an offering from ANZ New Zealand which issued €500m in a 10-year at midswaps+60bp (-20bp versus IPT).

Other issuance took in REIT Covivio which issued €500m in a 12-year at midswaps+120bp. State-owned La Poste issued 8-year and 15-year deals at midswaps+65bp and midswaps+90bp, respectively, for a combined €1.5bn. In sterling, Rothesay Life took £400m in a 10NC5 Tier 2 at G+515bp and New York Life issued £550m in a long 6-year at G+88bp.


Markets mixed ahead of central banks

US job opening dropped to their lowest level in five months in July and came after a weaker than expected non-farms print for August last week. The data adds to the view of a slowing US market and with the Fed up next week, and the market is expecting a 25bp rate cut.

The news made for a weaker open to the US session in equities leaving stocks up to 0.8% lower. That was before news of John Bolton’s firing (Trump’s hard-line national security advisor) which allowed a moderate recovery to flat before they gave way again and resided in the red, as at the time of writing.

In Europe, the bourses closed a little higher in an unspectacular session. Rates, though, continued to sell-off. We added another 4bp in yield to the 10-year Gilt, now up at 1.63% just as the Remainers continue to circle the Boris Johnson government. The 10-year Treasury yield rose to 1.69% (+7bp) while the Bund yield rose to -0.56% (+2bp). BTP 10-year yields were back up over 1% at the close.

The synthetic indices reversed the previous day’s gains, and had Main up at 49.4bp (+1.5bp) and X-Over protection higher by 7.5bp at 246.5bp.

In the cash market, we endured another fairly dull session with low flows and volumes, but we edged wider for choice. The iBoxx IG index was a basis point wider at B+124bp while the HY index was B+415bp (unchanged). IG’s performance has fallen back as the underlying has sold off, with returns now back down at 6.8% YTD, AT1 returns at 11.7% and HY index total returns to 8.9% – all year to date.

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.