31st May 2017

Ending May with a flourish

MARKET CLOSE:
iTraxx Main

62.4bp, +0.1bp

iTraxx X-Over

253bp, +1.1bp

10 Yr Bund

0.29%, -1bp

iBoxx Corp IG

B-+119.5bp, unchanged

iBoxx Corp HY

B-+323bp, -1bp

10 Yr US T-Bond

2.20%, -2bp

FTSE 100 (live)

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DAX (live)

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S&P 500 (live)

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That’s all folks – for Chapter 5…

May has been good for the corporate bond markets. From a total returns perspective, they’re up 0.4%, 0.7% and a stunning 1.5% for IG, HY and sterling corporates, respectively. That’s all come on index tightening (Markit iBoxx) of 3bp, 27bp and 9bp, respectively, in the month.

Broken down, much of the performance has come from the rally in the underlying for sterling; spread performance in HY and the anchoring of the front-end of the curve for this shorter duration product – while IG risk has benefited but less so from both. We are looking for June to play out with a similar construct, although there might be a jitter or two around the UK election through next week, unlike the French parliamentary ones which seem to be heading for a more ‘market friendly’ result.

Primary also closed out May with some gusto as a plethora of deals greeted us, and with something in there for everyone. The list of deals was long. And we believe days like Wednesday set us up nicely for more of the same through this month ahead of and into the summer break. That is, confidence will be high and will likely flesh out more deals into a spread tightening trend.

After that poor April for IG non-financial issuance, we recovered well in May helped along by some big borrowings from the likes of GE (€8bn), LVMH (€4.5bn), Allergan (€2.7bn), Apple (€2.5bn) as well as EoN and IBM (€2bn each). And that high level of supply did not negatively impact spreads, although not all deals in the month have managed to trade through re-offer levels.

At this stage, it’s probably as important- if not more – that investors get some risk on board. They’re certainly suggesting that to be the case given the willingness to accept some serious ratcheting tighter in final pricing of issues versus the initial price talk. All told, the corporate bond markets have had a better than expected time of it in 2017 so far. High yield has returned a stunning 3.6% so far with investment grade total returns at a not-to-be-sniffed-at 1% year to date. There’s no need to change strategy in June.


Effusive primary makes for a busy month-end

Neste OYJ printed €400m in HY

There’s nothing like a gushing primary market on the final day of the month to keep one busy. We had APRR in a 15-year deal for €500m (15bp inside IPT), RCI Banque issued a 5-year €750m (-13bp versus IPT), Metso Corp added €300m in a 7-year (-15bp versus the initial talk) while St Gobain came in for 10-year finding at midswaps+62bp (-13bp versus initial guidance). FCC Aqualia added €1.35bn in a senior secured offering with a dual tranche 5-year and 10-year offering.

For IG non-financials, we ended the month with issuance at €34,700m, the second best month of the year. The total YTD issuance for investment grade supply now stands at €128,135m. The single-A rated US group Prologis printed £500m in a 12-year maturity.

In senior financials, BNPP came with yet another TLAC-eligible senior non-preferred deal, this time €750m in a 7-year maturity while US Bancorp lifted €1bn. These deals take the total for the month of senior issuance to €20.25bn for senior financials. BFCM opted for sterling issuance in a £400m offering. In the T2 space, Banco de Credito Social Cooperativo offered 7.75% yield for a 10NC5 structure for €300m.

In high yield, we had Stora Enso for €300m and Neste OYJ printing €400m, combining to take the total level of issuance for the month to €3,265m.


Macro mixed

The good: Eurozone inflation dropped to 1.4%, suggesting the recent dovish tone from Draghi was well-intended (core was down at 0.9%), but the region’s unemployment rate also declined to 9.3% suggesting that the economic recovery was gathering some steam.

The not so good: In the US, a forward-looking home sales gauge suggested deteriorating affordability and Midwest factory growth slowed markedly in May.

So, equities had enough of an excuse for a positive session in Europe – but came they off their highs following that weaker than expected US data stream. The DAX was up at over 0.6% and most other bourses up in similar fashion at one stage but they ended quite mixed.

Government bond markets also went through a mixed day. Gilts endured some weakness into the close to end up yielding 1.04% (+4bp) as domestic politics likely served up enough concern or otherwise. The same maturity Bund yield closed at 0.30% (unchanged) and the OAT was yielding 0.73% (also unchanged). Italian election jitters seemed to recede as the 10-year BTP got a bid behind it to yield as low 2.14% (-3bp) before it closed a basis point higher.

In the corporate bond market, focus was on the primary market alongside month-end portfolio shuffling dynamics, and so we closed unchanged amid little turnover. The Markit iBoxx index closed the month at B+119.5bp and the sterling index at G+139.3bp (-0.5bp). The high yield index was left at B+323bp (-1bp).

The indices closed with Main at 62.4bp (+0.1bp) and X-Over at 253bp (+1.1bp).

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.