16th September 2019

Event risk swatted away

MARKET CLOSE:
iTraxx Main

46.5bp, +0.9bp

iTraxx X-Over

243.8bp, +5.5bp

🇩🇪 10 Yr Bund

-0.48%, -3bp

iBoxx Corp IG

B+119bp, -0.5bp

iBoxx Corp HY

B+393bp, +2bp

🇺🇸 10 Yr US T-Bond

1.85%, -5bp 

🇬🇧 FTSE 100 6220.14, (+0.87%) 🇩🇪 DAX 12021.28, (+3.75%) 🇺🇸 S&P 500 3080.82, (+0.49%)

Markets resilient as geopolitical risks rise…

The attack on Saudi oil installations over the weekend ought to have put a bit more of a dampener on the week’s opening session, as markets took up only a moderately defensive positioning. Oil prices rose by 10% and there might well be a medium-term impact on global macro, just as we assess the geopolitical implications for the region and beyond.

In addition, Chinese industrial production slowed by its greatest level since 2002 with a lower than expected rise in output of just 4.4% year-on-year in August, and down from 4.8% in July. So the nerves ought to have been jangling much more than they were, but markets put on a decent performance amid the rising event risk/slowing macro.

In credit, though, the action was squarely in primary amid a flurry of deals in the day, and we’re most certainly looking at a record for the full year for volumes in the euro-denominated IG non-financial corporate bond market. There’s no stopping the corporate bond market.

Credit spreads continued to tighten amid fears of tightening secondary market liquidity come November when the ECB resumes its bond purchase programme and we saw more of the compression between high and low beta markets.

So in primary, coincidentally, it was oil that dominated. BASF-owned oil and gas group Wintershall Dea came in with a 4-tranche deal just as GlaxoSmithkline populated the front-end of the curve with a triple-tranche, 2-4 year maturity lift. PostNL and RCI Banque were also busy getting deals away. ASB, Unicredit, Sabadell and Allianz were some of the representatives for the financial sector.

The glut of issuance – if it continues – is going to act as a limiter on spread tightening eventually, even with the ECB active come November. In addition, this week’s deal flow might be interrupted by the FOMC meeting, where the Fed (already well behind the curve) is expected to cut rates by 25bp on Wednesday. Notwithstanding that, the day’s deals were met with excellent demand and allowed borrowers to reduce final pricing by the now obligatory 20-30bp versus initial guidance.

In addition – and it wasn’t so rosy before that – almost all of the recent deals are tighter versus reoffer levels, helped no doubt by that ECB announcement last week which spurred a significant tightening in the market – especially on Thursday and Friday.


Primary IG non-financial issuance records beckon

So, the second half of September is off to a flyer, mirroring the heavy deal flow seen during the first half of the month. We had a massive €7.4bn of IG non-financial deals in the session and the tally for the month rose to a massive €35.7bn, surpassing the 2014 high for a September month. And we’re just over halfway through the month! For the year to date, issuance has risen to €238bn and now well on target for a record year (€285bn, 2009).

Wintershall’s offering was the pick of the bunch in the day’s offerings and they were not shy in coming forward. They issued 4-year debt for €1bn at midswaps+85bp, €1bn in a 6-year at midswaps+115bpp and €1bn in a 9-year at midswaps+145bp. The triple-B rated corporate borrower followed up with a 12-year, and took another €1bn at midswaps+175bp. Total books were up at over €10bn and final pricing across the tranches was 25bp inside the initial guidance levels.

GlaxoSmithkline went for front-end funding, with a 2-year floater at Euribor+28bp for €1.5bn, a 2-year fixed deal for €500m at midswaps+28bp and a 4-year maturity for €500m at midswaps+35bp. Final pricing was 7-15bp inside the initial levels. RCI Banque issued a 3.5-year €600m at midswaps+75bp, some 25bp inside the initial guidance off a €1.8bn book. Bringing up the rear, we had PostNL’s green issue in a 7-year maturity at midswaps+97bp for just €300m – and 23bp inside the initial mumble.

In financials, Unicredit printed €1.25bn in a 10NC5 Tier 2 issue at midswaps+240bp (-25bp versus IPT), Sabadell issued €500m in a 5.5-year senior non-preferred at midswaps+155bp (-30bp versus IPT) and ASB also issued €500m in a 10-year at midswaps+65bp (-10bp versus IPT, with books at just €700m).

In the insurance space, Allianz issued €1bn in a 30NC10 Tier 2 at midswaps+135bp, while Metlife Global issued in a funding agreements backed €500m in a 3-year (midswaps+40bp, -20bp versus IPT) as well as £500m in a FA backed 10-year at G+108bp. And finally, Coventry Building Society issued £400m in a long 3-year senior preferred at G+105bp.


Oil rockets, but markets steady

The oil price zipped 10% higher and the potential consequences allowed rate markets to get a bit of their recently lost mojo back. As such, the 10-year Bund yield declined to -0.48% (-3bp) while Boris Johnson’s meeting with Juncker amid hopes (or otherwise) of a deal saw Gilts bid up, and yields on the 10-year lower at 0.70% (-6bp). US Treasuries were yielding 1.85%, as at the time of writing, around 5bp lower.

The slide in global stocks was limited, where equities only lost up to 0.7% in Europe, for which we think is a decent enough performance given that Brent jumped 10% to $66 per barrel.

In synthetic credit, and with the contract roll looming, iTraxx main closed 0.9bp higher at 46.5bp with X-Over at 243.8bp (+5.5bp).

In cash, clearly the focus was on primary leaving secondary parched of flows. Secondary closed essentially unchanged leaving the iBoxx IG index at B+119bp (-0.5bp) with the HY index left at B+393bp (+2bp).

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.