11th April 2018

To be forewarned is to be…

MARKET CLOSE:
iTraxx Main

57.4bp, +0.3bp

iTraxx X-Over

284.8bp, +4.4bp

10 Yr Bund

0.50%, -2bp

iBoxx Corp IG

B+106.3bp, unchanged

iBoxx Corp HY

B+325bp, unchanged

10 Yr US T-Bond

2.78%, -2bp

FTSE 100

7,661.87, 10.54
DAX

12,540.73, 47.76
S&P 500

2,801.31, 3.02

Batten down the hatches!

There may be trouble ahead

Trump’s latest tweet, readying for an attack on Syria and warning the Russians that the missiles were coming had the markets paying much more attention to the situation in the Middle East. With the US on the brink of launching some kind of offensive on the Syrian state, the Russian threats of retaliation are also going much further than ever before.

The markets weren’t busting a gut to break out of tight ranges before the tweet, but did following it – and moved sharply lower.  Safe-haven government debt moved from being unchanged to being better bid as the tensions rose.

Credit primary, though, was again busy and we finally had a spate of non-financial corporate borrowers looking to get some funding in. There was no stopping the primary market when all others might be losing their poise into the macro and/or geopolitical emerging event risk. Depending on how the situation in Syria plays out overnight, that might be different in Thursday’s session – and might just bring the week’s activity to a premature end.

Equities, therefore, took a predictable leg lower, government bonds went slightly better bid, credit primary got its deals away but we had little happening in the secondary market which was better offered if anything else. The situation is going to do exacerbate the current weakness that we are seeing on macro as its saps confidence in big investment and spending decisions which might be deferred, at least until we have a better handle on how this particular situation might play out. Lest we forget, the USA/China trade feud. It is still ongoing and despite the conciliatory tones and nature of President Xi’s comments on Tuesday, we’re needing to see some concrete action.

We would probably remain lighter participants for now. New issues will continue to come, and they will offer juicier – or rather slightly higher – concessions in order to get away. Secondary performance of deals has left much to be desired, as issues are not performing with around 70% of this year’s cohort trading wider than reoffer. However, this will not stop investors getting involved, as sidelined cash needs to get invested and the carry offers some compensation for any moderate weakness in spreads. A general trend towards lower levels of oversubscription in recent primary suggests this dynamic is already in place.


Primary effusive, but it might not last

€500m for Scania

The deals came thick and fast in non-financials. Euronext was first out of the blocks printing €500m at midswaps+42bp for a 7-year maturity offering – taking 13bp off the initial guidance with a decent €2.2bn of orders. Banque PSA followed up with €500m of its own, but in a 5-year maturity priced 15bp inside the opening talk at midswaps+50bp with €1.4bn in orders. Scania opted for a 2.5-year floater for €500m at Euribor+30bp (book €1.1bn) with Renault wrapping up the trio of deals from auto borrowers. The group opted for 6-year funding at midswaps+60bp for €700m (-15bp versus IPT, books €2.4bn).

The four deals produced €2.2bn of issuance and €3.45bn for the week so far with the monthly total rising to €8.1bn.

In financials, ABN Amro Bank printed in 7-years for €750m in green format at midswaps+28bp, insurer Hannover Rueck took 10-year funding for €750m at midswaps+27bp and real estate group Inmobiliaria Colonial Socimi SA lifted €650m in an 8-year at midswaps+133bp (notably -17bp versus IPT).

Elsewhere, anything Ireland and the Province of Ontario can do, Portugal and the Province of Alberta can too. Alberta issued €1.5bn in a 7-year at midswaps+5bp and Portugal revisited for the second time this year with €3bn in a long 15-year offering at midswaps+102bp, with an order book in excess of €15bn.


Geopolitics and macro test markets

US inflation was on the up, with the core CPI reading come in at 2.1% year on year in March, versus 1.8% in February. Domestic price pressures might be increasing, but Treasuries rallied due to the tensions in the Middle East. The 10-year yield fell 2bp to 2.78%. Bund yields also declined, with the 10-year 2bp lower at 0.50%. Gilt yields in the same maturity declined to 1.38% (-2bp) with data earlier in the session pointing to weaker than expected GDP growth of 0.2% in Q1, alongside weak manufacturing production in February which declined 0.2% month on month (forecast was for a rise of 0.2%).

European equities were a sea of red throughout the session. But there was nothing overly disastrous in the declines. It all felt fairly measured with losses of up to 0.8% across the various bourses. Those Middle East tensions saw Brent trading off a $72-handle, the highest level since early 2014. US equities were fighting back from losses of up to 1% at the open to being flattish (at the time of writing).

Buying a little protection to hedge against any credit downside makes sense and would be a responsible move. After being better offered for a few sessions (lower, cheaper) the indices only edged higher on Wednesday. We closed the session with Main up at 57.4bp (+0.3bp) and X-Over to 284.8bp (+4.4bp).

Cash in secondary was again doing little in terms of activity but also in terms of spreads, closing unchanged with the Markit iBoxx IG index at B+106.3bp with the high yield index also unchanged with the index at B+325bp.

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.