9th January 2020

🗞️ Dropping like flies

MARKET CLOSE:
iTraxx Main

42.9bp, -1.1bp

iTraxx X-Over

203.8bp, -6.1bp

🇩🇪 10 Yr Bund

-0.23%, +3bp

iBoxx Corp IG

B+105.7bp, -0.5bp

iBoxx Corp HY

B+346bp, -5bp

🇺🇸 10 Yr US T-Bond

1.90%, +2bp

🇬🇧 FTSE 100 6179.75, (+0.06%) 🇩🇪 DAX 12697.36, (-0.80%) 🇺🇸 S&P 500 3197.52, (+0.60%)

First North Korea, now Iran…

The scuffle between the US and Iran in the opening week of the year served to reset the date for when we kicked-off for 2020 to Jan 7th. And, as we expected, equities are on the up and credit primary has come out the blocks albeit probably anticipating another event which closes the window!

Get it done, quick. That is, the sluice gates have opened but they might shut sharpish if we’ve called the US/Iran situation wrong, for example. It was day 3 of the deluge.

All equity markets are back in the black (S&P posting fresh record highs) and the relief rally looks like it has legs in it yet. Secondary IG credit has edged wider, probably on valuation (giving back some of December’s low-flow driven tightening) – but not helped by the volatility in equities. Few are chasing it on expectations of heavy supply. Higher beta credit – CoCos and high yield corporate markets specifically, have been unmoved by it all and outperforming, relatively.

That’s because there isn’t the expectation that markets will be flooded with deals from these sectors, while the need for yield remains very strong. It also goes to show that credit investors have far from panicked (rightly so) by the unfolding events in the Middle East, leaving equities and rates to do all the heavy lifting instead.

The data though coming from the Eurozone (on Thursday it was weak German exports in November, adding to the poor manufacturing orders data for the same month) suggests that the region faces a difficult Q1/2. That just means policy will remain accommodative and market rates will likely stay anchored at around these levels. It seems all that markets continue to hope that any US economic upside will pull global macro out of the doldrums. It won’t.

With global trade disrupted, even with that ‘phase 1’ deal expected to be officially signed this month, there will be other trade skirmishes ahead. Besides, the global economy just looks tired, and in need of some kind of shakeout.

That plays into our view that we have a more disjointed global macro construct. The US is a winner. Trump’s more isolationist trade policies have made sure of that and the US is doing just fine, given the circumstances. After all, US stocks are at record levels, unemployment is at record lows, there’s decent wage growth and consumption is holding up.


The deluge continues

As night follows day, we just needed Toyota to get a deal on the screens and a utility as well, where E.ON and Red Electrica duly obliged.

Toyota deal

Red Electrica issued €700m of an 8.5-year priced at midswaps+43bp with books up at a massive €4.75bn seeing that final pricing 27bp tighter than the initial talk. Japan’s Toyota Motor got in with €1bn in a 6.5-year at midswaps+35bp, priced 20bp inside the opening guidance with books at a very decent €2.6bn.

Cellnex was next, lifting €450m in a long 7-year at midswaps+120bp and generating another excellent book of €3.5bn with final pricing 35bp inside the initial guidance.

Merck issued €750m in a 5.5-year at midswaps+35bp and another €750m in an 8.5-year tranche at midswaps+47bp. The deals were 23-25bp tighter across the tranches at final pricing and the demand for them at an impressive €5.5bn.

Bringing up the rear was E.ON which issued a combined €2.25bn in a 3-tranche splurge taking €750m in a short 4-year at midswaps+35bp, €1bn in a long 7-year at midswaps+50bp and €500m in a short 11-year at midswaps+70bp. Final pricings were 15-20bp tighter across the tranches versus IPT and books for the deals came in at €4.8bn.

So that deal flow in the session takes the 3-day total (since the market reopened) of IG non-financial issuance past the €10bn barrier (to €10.75bn) and has us well on the way to passing the €27bn issued in January 2019.

The sole high yield offering came from Ashland Services, in the form of a €500m transaction in an 8NCL deal priced to yield 2% (-25bp inside IPT).

Financials had yet another very busy day with senior and subordinated deals littering the market. In the senior sector we had Nykredit Realkredit issue €750m in a 7-year SNP (senior non-preferred) at midswaps+80bp (-20bp versus IPT).

There was Caixabank’s €1bn 5-year senior preferred priced at midswaps+58bp (-17bp versus IPT) as Standard Chartered issued €750m in an 8NC7 structure at midswaps+90bp, which was 15bp inside the initial price talk. Credit Agricole Italia issued a combined €1.25bn across 8-year (€500m) and 25-year (€750m) tranches at midswaps+23bp and midswaps+45bp, respectively.

OP Corporate Bank took €500m in a no-grow 7-year SNP at midswaps+65bp (-15bp versus IPT) and we finished the with euro senior bank deals with €1.5bn from Deutsche Bank with a 7-year SNP at midswaps+170bp (-20bp versus IPT).

That glut of deals took the senior financial primary issuance this month – well, in the last 3 days – to €16.25bn and just shy of the €17bn issued in the whole of January last year. There were also deals in sterling senior markets, with Deutsche Bank present here, too, for £850m in a short 5-year SNP at G+210bp (-20bp versus IPT) while ABN Amro issued £500m in a 5-year senior preferred at G+80bp.

In the subordinated space, a busy Banco Santander took AT1 funding, in a perpNC6 priced to yield 4.375% for €1.5bn with books at a huge €7.5bn and final pricing 37.5bp inside the opening level. Banco de Sabadell issued in Tier2 with 10NC5 debt for €300m at midswaps+220bp.


Risk back on

Elsewhere, records were again being set in US equities and we had talk of possible stimulus in the UK to help reinforce the expectations of a recovery in the UK economy. Fighting talk – and keeps hopes alive of cheap liquidity necessitating asset bubbles. No point in fighting it.

Anyway, it was a good day for risk markets. All three US equity bourses were printing fresh record intraday levels as at the time of writing. The Dax rose by 1.3% and the FTSE by 0.3% – all obviously helped by a collective sigh of relief that the prospect of any further near-term Middle East hostilities will be avoided.

That meant rates were slightly better offered, leaving the 10-year US yielding 1.90% (+2bp) and the Bund in the same maturity -0.23% (+3bp). The 10-year Gilt yield was unchanged at 0.81% at the close.

Credit protection costs declined, leaving iTraxx Main to close 1.1bp lower at 42.9bp and X-Over 6.1bp cheaper at 203.8bp.

In cash, we saw some reversal in IG spread weakness as the improved tone helped push secondary a touch better – despite all the deals, and the iBoxx IG index was marked at B+105.7bp (-0.5bp) at the close of play.

We saw a squeeze on CoCo bonds leaving the index tighter by 16bp at B+B+377bp – and the tightest level since mid-2018. The high high yield market was only going to be a little better and the index managed 5bp of tightening to B+347bp at the close.

Have a good day.

Suki Mann

A 30+ 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 CreditMarketDaily.com.