14th October 2019

False start

MARKET CLOSE:
iTraxx Main

55.2bp, +1.4bp

iTraxx X-Over

244.2bp, +4.5bp

🇩🇪 10 Yr Bund

-0.47%, -3bp

iBoxx Corp IG

B+122.5bp, unchanged

iBoxx Corp HY

B+413.5bp, -1bp

🇺🇸 10 Yr US T-Bond

1.73%, unchanged

🇬🇧 FTSE 100 6144.25, (+1.26%) 🇩🇪 DAX 11657.69, (+1.33%) 🇺🇸 S&P 500 3036.13, (+0.74%)

Fragile trade truce get us off to a weak start…

It looks like markets had gotten ahead of themselves. The hopes of a Brexit deal are looking more precarious again, with the EU once again reportedly playing hardball. The potential for a US/China ‘limited’ trade deal has underwhelmed so far, but at least we might have something which might help calm the tensions.

But the Middle East is where the real event risk is right now, as the Syrian army (backed by Russia) has lined up with the Kurdish administration to help stem the Turkish advances into northern Syria. The reaction: Gilts gained a good bid (10-year, -9bp in yield at one stage) as sterling lost ground (Brexit-related) and equities were lower amid nervousness on all three of the aforementioned developing situations, as we unwound some of last week’s stellar gains.

We are at the halfway stage of the month, and it has been an eventful one. The earnings season for Q3 is upon us as well and might serve to add a little volatility to equities, just to complicate things. Rates are enjoying a degree of volatility as well. If the UK government manages to ‘get Brexit done’, then we are likely going to see a sell-off in government bonds as an initial reaction. Once the Brexit premium has been traded out, macro, trade talks and the Middle East will dictate market direction.

In credit, we inexorably move towards that record year for issuance in the IG non-financial primary market. Two weeks in and we are up at €14bn for the month and at €265bn YTD, needing to pass €285bn (from 2009) to achieve the record. It is going to happen, most likely by mid-November at the very latest.

IG Issuance

Almost….there. Records beckon.

More so, November can easily add €30bn to the pot (€30bn+ is not unusual for November issuance) and if we get that, then €300bn+ for the year would smash previous records.

In spread terms, we’re flat for the month so far but given the volatility in equities, the sell-off in rates and the numerous event risk potholes which threaten to derail the markets, that’s not so bad. We have tightened 50bp in IG nevertheless this year, an excellent 225bp in the high beta AT1 index and by some 110bp in the high yield market.

IG iBoxx index spreads:

IG iBoxx index spreads

With the low hanging fruit picked, it’s getting more difficult to understand how the ECB’s purchase programme might impact valuations. We are unlikely going to see the ratchet tighter in spreads, for example, that we saw last time. Instead, their involvement this time might be to help support the market and, at best, elicit a grind tighter into year-end.


Primary still pumping out the deals

Acquisition funding got the week off to a good start. ZF Friedrichshafen, a German-based auto parts maker, was in the market pre-funding its $7bn acquisition of Wabco Holdings. The low triple-B borrower came for 4-tranches for a combined and increased €2.7bn.

They issued €500m in a 4-year at midswaps+185bp, €900m in a long 6-year at midswaps+245bp and €600m in an 8-year at midswaps+280bp. They followed up with a 10-year for €700m at midswaps+320bp. The final pricing was 20-30bp inside the initial guidance across the various tranches, with books up at over €9bn.

Deal: Credit Agricole

The other corporate borrower in the market was the state-owned Deutsche Bahn which issued hybrid bonds. They lifted €1bn in a PerpNC5.5 to yield 0.95% and another €1bn in a PerpNC10 priced to yield 1.6% with combined books up at a massive €8bn, and final pricing around 40bp inside the opening guidance.

The other deals of note came from Credit Agricole which issued €1bn in a 6-year senior non-preferred offering at midswaps+68bp (-17bp versus IPT) with UBI Banca following up with a no grow €500m in a 5.5-year senior non-preferred deal priced at midswaps+198bp (-22bp versus IPT).


Little doing in markets

US bond markets were closed for their Columbus Day holiday although the equity markets were open. Nevertheless, the session in Europe was a quieter one. Once equities had made their earlier moves, there was little real follow-through or direction. The FTSE closed 0.5% lower, the Dax was off by 0.2% and US equities were flat at the European close.

The better bid for Gilts reversed some of Friday’s weakness and although the gains faded a little, the 10-year yield moved 7bp lower to 0.64bp. For Bunds, we were back at -0.46% (-2bp).

Credit index moved higher into the equity weakness and general market tone, leaving iTraxx Main at 55.2bp (+1.4bp) and X-Over at 244.2bp (+4.5bp).

In cash, secondary wasn’t offering much, and valuations left unscathed despite a more defensive tone. So it left the iBoxx IG cash index completely unchanged at B+122.5bp. The AT1 market similarly did very little and was unchanged with the index left at B+481bp as was the high yield market, and the index closed at B+413.5bp.

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.