19th September 2018

Fixed income feels the chill

MARKET CLOSE:
iTraxx Main

60bp, +0.4bp

iTraxx X-Over

280.2bp, +0.4bp

🇩🇪 10 Yr Bund

0.48%, unchanged

iBoxx Corp IG

B+130.3bp, -1bp

iBoxx Corp HY

B+380bp, -3bp

🇺🇸 10 Yr US T-Bond

3.07%, +2bp

🇬🇧 FTSE 100 6001.89, ERROR 🇩🇪 DAX 12764.80, ERROR 🇺🇸 S&P 500 3397.16, ERROR

Rates are the story…

The only market bursting out of the blocks is the rates one, that is, with yields heading higher and close to setting the highs for the year in the US (10-year), while the 10-year Bund yield up at close to 0.50% is still 27bp short of its highest level for 2018. The direction of travel for both markets at the moment is the same – higher in yield terms. There might be trouble ahead for emerging market borrowers as higher rates feed into higher refinancing costs against a more difficult economic backdrop once those higher tariffs start to bite.

So a more hawkish policy by the Fed is now feeding into rates and everything is being dragged higher with rising US Treasury yields. Ten year Gilt yields were up at 1.61% (+4bp) and are just 4bp shy of the previous high for 2018. The more conciliatory words from the EU about a deal on Brexit of late may have helped market confidence in the UK, too (reduced the bid for safe-haven Gilts), although UK equities have failed to get much of a boost (up by around 0.4% in the session).

We still think that Bund yields are most unlikely to get too much past 0.60% this year in the 10-year (0.48%, unchanged), while US Treasury yields are unlikely going to see much higher than 3.25% before the year is out (now 3.07%, +2bp). There are still many uncertainties on the geopolitical/economic front still, and they ought to cap how far the sell-off in government bonds might go.

For sure, rate market total returns this year are going to be negative (in the -0.5% to -2% area for Eurozone govvies), while credit returns are also going to be affected by any weakness in rates – likely keeping IG and HY credit in the 0% to -1% area (euro denominated markets).

Sterling credit total returns are going to fare much worse given the longer duration of the market and that relatively more aggressive sell-off in the Gilt market. Total returns exceeding -2% to -3% are quite possible – they’re already -1.9% YTD.

And while the direction of travel in equities is also the same, the European equity markets are moving with much more caution versus a more exuberant US one. Nevertheless, that better tone in equities – with the US/China trade war being ignored for the moment – is helping credit spreads edge tighter. And primary is once again in good form.


At last, some good non-financial supply

So the non-financial IG corporate sector finally came up trumps. Following several sessions of just the odd deal per day, we had a handful to contend with on Wednesday and the demand for them was considerable.

That depth of investor demand is understandable given the elevated levels of investor cash balances needing to be invested – and there is an increasing desperation as we head towards the end of the year. Final pricing is thus being squeezed hard versus the usual enticing opening guidance – but by some considerable margin just about across the board.

We had Toyota take €600m costing them midswaps+33bp for 5-years. The borrower generated a €2bn book and managed to reduce the initial market guidance by 17bp at final pricing. JT International Financial Services (that is, Japan Tobacco) issued €550m in a 7-year at midswaps+60bp where the near €3bn book saw final pricing reduced by 20bp, and the borrower also took £400m at G+110bp with £1.6bn of interest. Unusually for the sterling market, pricing was rammed tighter by 20bp versus the opening guidance.

The US’ DXC Technology issued €650m in a long 7-year priced at midswaps+110bp off a 2.5x subscribed book (-15bp inside IPT). For the month, euro-denominated IG non-financial corporate bond issuance has now reached €19.5bn from 31 individual issues. On Thursday, AkzoNobel Specialty Chemicals is expected to price a multi-tranche dual-currency euro/dollar deal.

In financials, insurer Phoenix Group Holdings printed €500m in a long 10-year in T2 format at midswaps+350bp, while NatWest Markets went for senior 3-year floater format for €1.25bn at Euribor+95bp. Luxembourg’s BIL was the other senior print, out with a 5-year €300m effort at midswaps+120bp.


Positive midweek session

All being said, it was a positive session for risk assets. The positive opening in the US gave some impetus to European stocks, for a change, and bourses this side of the Atlantic rose by up to 0.5%. The Dow was higher again and is now around 150-points (less than 1%) away from setting a new record. The S&P is still within touching distance too of a new record high.

There was little by way of news flow on the political or economic front that the markets might have been concerned with, although in Europe, art was all about the EU gathering and the reaction/decisions or otherwise on the future of the Brexit negotiations. More of that for sure on Thursday.

The synthetic credit indices were barely changed, with Main left at 60bp and X-Over at 280.2bp (both 0.4bp higher) in a very quiet session.

The secondary cash market was similarly unexciting given the focus on the primary deals. The slightly better tone saw to it that we were better bid for choice and that spreads were tighter, the IG iBoxx index left at B+130.4bp (-1bp). That’s 5bp tighter this month so far. And the high yield market also squeezed tighter again, by 3bp to B+380bp – that’s 18bp tighter this month.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.