29th October 2019

Finally!

MARKET CLOSE:
iTraxx Main

51bp, +0.8bp

iTraxx X-Over

232.5bp, +4.5bp

🇩🇪 10 Yr Bund

-0.35%, -2bp

iBoxx Corp IG

B+113bp, unchanged

iBoxx Corp HY

B+403bp, +1bp

🇺🇸 10 Yr US T-Bond

1.84%, -1bp

🇬🇧 FTSE 100

7436.64, (-0.58%)
🇩🇪 DAX

13664.00, (-0.91%)
🇺🇸 S&P 500

3373.23, (-0.70%)

Clarifying Brexit moment looms…

Investors will be hoping that this week trades out as well as it has started. The FOMC, US data deluge (earnings and key macro), Brexit/UK election and the US/China trade talks have thus far failed to dampen the mood. While that concoction of event-risk might be expected to have an impact on market direction affecting rates and equities especially, credit markets continue to slip through the net.

Spreads continue to grind tighter. The opening couple of sessions of the week already have primary pumping out deals and we are going to close out an excellent month for new deals. Demand remains elevated, the ECB QE is nigh, spreads are tightening, new deals are performing and investor confidence is high. Records beckon.

We’re on election footing in the UK with a December vote. This Brexit story is reaching its denouement – we hope, anyway! The election will effectively be seen as the second Brexit referendum. And no one is going to be overly confident to call the final result. Brexit can only be solved if a working majority for a government is the outcome of the vote.

As for the Fed, the markets are looking at a 25bp rate cut this week, while key macro data through Wednesday and Thursday might proffer some hint as to the timing of the next one. The accompanying communique hopefully will.

The earnings season has been decent, save for some corporates missing in the heavy industrial industries affected by the trade talks, alongside others missing following big write-downs (of say, previous acquisitions). Apple and Facebook are up next.

It doesn’t seem as though we are going to get much on the trade talks situation, save for the odd musings from Trump that they’re on track. He might be saving the impact of a positive outcome (?) for when he meets with China’s Xi next month.

In the meantime, we have seen the S&P hit a record intraday high after closing at a record level. European stocks seem to be heading higher albeit rather begrudgingly. Eurozone macro is feeling the heat at the moment, after all.

In rates, yields have been rising fairly consistently through October, which goes against what we might have thought given the ECB’s imminent interest in the market and the weakness of the incoming data.

Credit primary is looking good. We’ve had a very solid October issuance-wise. November can easily deliver €20bn+ – after all the average over the 2014-2018 period has delivered an average €30bn of issuance in IG non-financials. Spreads are grinding tighter. It’s not exciting, but we are edging tighter in each session. It could be different next week, as the ECB makes its intentions clear.


Some primary milestones

JP Morgan: Senior offering on Monday

After JP Morgan’s €1.75bn senior offering on Monday was followed by Sabadell’s €500m 6NC5 senior preferred offering on Tuesday, priced at midswaps+97bp (-18bp versus IPT), the issuance so far this year is now the best for senior deals since 2016.

We’re up at €146bn and most likely looking at somewhere around the €160bn mark given the seasonal slowdown for this category of issuance that we usually have.

That small issuance fact was lost on the market though! The focus was on Eli Lily’s deal. The US pharmaceuticals group took a combined increased €1.6bn in a dual-tranche offering. The borrower took €600m in a 12-year at midswaps+55bp (-30bp versus IPT) and €1bn in a 30-year at midswaps+125bp (-20bp).

As for IG non-financial issuance, we’re now up at €273bn which is the second-best level for any year and leaves us around €12bn short of the 2009 record (€285bn).

The other deal of note came from SEB which issued $900m of a perpNC5.5 AT1 offering priced to yield 5.125%.


Markets trade in narrow range

What else, but more records in US equities? As at the time of writing, they were in the black again and at intraday record highs, helping to pull European stocks back to around flat at their close. The latter had been comfortably in the red before the US open.

Rates were trading in narrow ranges. The 10-year Gilt yield was unchanged at 0.72%, the Bund was better bid to yield -0.35% (-2bp) and US Treasuries were left to yield 1.84% (-1bp) in the same maturity.

Cash credit failed to grind out some performance, amid little interest as flows and volumes were light. That left the IG iBoxx cash index unchanged at B+113bp, although that index level is 10bp tighter for October. And for the first time in a couple of weeks, we had the first spread reversal in AT1 spreads, leaving the index wider, at B+449bp (still 51bp tighter this month).

For credit index, protection was better bid (higher), leaving iTraxx Main at 51bp (+0.8bp) and X-Over at 232.5bp (+4.5bp).

Have a good day.

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.