6th March 2019

Go with the flow

MARKET CLOSE:
iTraxx Main

61.3bp, +0.5bp

iTraxx X-Over

277.8bp, +2.8bp

🇩🇪 10 Yr Bund

0.12%, -5bp

iBoxx Corp IG

B+146.1bp, +1.6bp

iBoxx Corp HY

B+447bp, +7bp

🇺🇸 10 Yr US T-Bond

2.69%, -3bp

🇬🇧 FTSE 100 6090.04, (-1.55%) 🇩🇪 DAX 12901.34, (-0.71%) 🇺🇸 S&P 500 3372.85, (+0.12%)

The crystal ball says…

The deals keep coming but there was a kind of lull in the market nevertheless. We’re pre-ECB and it’s likely going to be all guns blazing thereafter. Surely Draghi will present a more dovish policy stance amid continued (and increasing) weakness across the Eurozone, even if some have pointed to the last data print as suggesting that we’ve reached the bottom. We haven’t.

Bunds ought to get a better bid behind them (again), equities should rally and add to the super gains already in the bag for this year as the euro currency stays weak. Credit spreads ought to rally some more and add to the 28bp of (iBoxx index) tightening that has already exceeded all expectations this year. Alas, returns are going rise and we’re going to see out a solid opening quarter for 2019. Here’s hoping!

Corporate borrowers continued to tap the markets for deals on Wednesday, but if we are right – as above – funding costs are going to drop into tightening spreads amid continued robust demand for corporate bond risk. Although we can expect a reduced level of primary activity on Thursday, March’s overall issuance levels ought to be quite decent and might come close to what we have seen in January and February, where €26bn+ was printed.

Already this month, we’re up at around the €10bn mark for IG non-financial issuance, helped in no small way by that €7bn print from Medtronic earlier this week. With three weeks to go still before we close out the quarter, the €64bn+ of issuance year to date – with the promise of much more to come – takes us into the kind of volume seen in the heavier overall annual totals recorded in the pomp 2014-2017 period (average €250bn+ per year).


Primary still pumping deals

Saint-Gobain was back with €1.5bn issued

For IG non-financials, Saint-Gobain got the ball rolling with €1.5bn issued, split equally between 5-year and 12-year tranches. The former was priced at midswaps+57bp and the latter at midswaps+112bp, which was 18bp inside the opening guidance. The book was 2x oversubscribed.

Anglo American was also in the market, and also with a dual tranche but in euro and sterling currencies. The sterling effort was for an increased £300m in a 10-year at G+230bp (£750m book) and the second tranche was for €500m at midswaps+140bp in a 7-year maturity. The book for the euro-denominated deal was up at around €2bn and final pricing was 25bp inside the opening guidance.

In senior financials, ASB Finance issued €500m at midswaps+70bp for 5-year funding, and BFCM took €1bn in 10-year money in senior non-preferred format costing midswaps+118bp.

Elsewhere, property group Sagax took €300m in a 6-year at midswaps+205bp. the other deal came from state-owned Bank of China, which issued €500m in a 3-year at midswaps+60bp. We also had CYBG PLC, which owns Virgin Money, offer a 9.5% coupon for £250m in a perpNC5.25 AT1 deal.


Defensive markets, fixed income on top

The US trade deficit hit a 10-year high in 2018 (to $621bn), serving up a blow to Trump’s ambition to try and curb it, in data reported during the session. Also from the US, the private sector ADP employment survey showed that fewer jobs than expected were added in February, although January’s number was revised sharply higher.

With that, the session ended in yet another bore draw, with little really happening in Europe to promote a push higher or a lurch lower in risk asset pricing. The Dax closed 0.3% lower and the FTSE was up by 0.2%.

In the US, it was all about that trade deficit and equity markets were lower by around 0.6% at the time of writing. The 10-year Treasury was yielding 2.69% (-3bp). There was however some solid support for rates elsewhere, which saw the previous sell-off across Europe in a sharp reversal.

The 10-year Bund yield, as high as 0.19% a few days ago, was 5bp lower in the session at 0.12% at the close while the equivalent Gilt yield fell to 1.22% (-6bp). It didn’t help sentiment that a major auto sector widget maker (Schaeffler) reported a 13% drop in 2018 earnings in a sign that German Industry Inc is still feeling the pinch of the slowdown. In the US, .

Credit index had Main a touch higher at 61.3bp (+0.5bp) and X-Over at 277.8bp (+2.8bp), in a rather uneventful session. The cash market also saw some reversal – for the first time in a couple of weeks, with the weakness edging the cash index higher to B+146.1bp (+1.6bp). The strong rally in the underlying helped push total returns higher though and IG credit now returns 2% year to date.

That didn’t help the AT1 market, where moderate weakness helped spreads moved 12bp wider in the iBoxx index to B+593bp – that’s now almost 30bp wider of the tight level seen this year, at the end of last week. In high yield, the lack of deal flow couldn’t help stem some weakness and the market was probably better offered leaving the HY index at B+447bp (+7bp).

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.