9th September 2019

Primary Going Gangbusters

MARKET CLOSE:
iTraxx Main

47.9bp, +0.8bp

iTraxx X-Over

239.4bp, +0.9bp

🇩🇪 10 Yr Bund

-0.58%, +6bp

iBoxx Corp IG

B+122.9bp, -0.5bp

iBoxx Corp HY

B+414bp, -2bp

🇺🇸 10 Yr US T-Bond

1.62%, +7bp

🇬🇧 FTSE 100

7324.17, (+0.14%)
🇩🇪 DAX

13253.75, (+0.47%)
🇺🇸 S&P 500

3096.63, (+0.55%)

Records set to be broken…

We’re barely a week into September and we are already looking at records for European credit markets. That comes courtesy of the IG non-financial primary market, but we’re also looking at returns edging higher with each passing week.

Incredibly they are almost into double-digit territory for all fixed income classes. It’s a fantastic effort, just ahead of it becoming odds-on that the ECB (later this week) and the Fed (next week) are about to turn on the liquidity taps.

Government bond yields might have had a decent sell-off a few sessions ago on hopes of a US/Chinese breakthrough and a triumvirate of positive news on the political front which was crammed into a single session. Nevertheless, the former has left us thinking it might be a false dawn – we’ve had plenty of them, while on the politics side there is incredible uncertainty regarding the next move on the Brexit front.

The new Italian coalition might not (likely will not) hold for long. Only the situation in Hong Kong seems to have calmed.

Safe havens have recovered some lustre and central bank action might well be the catalyst to push, for example, that 10-year Bund yield zooming through -0.75% en route to -1.0%. Uncertainty in UK politics is going to take that 10-year Gilt yield to a new record low. A Fed rate cut might be priced in, but cheaper liquidity will prop up US equities and the impact will be to lift all other equity markets.

The party is going on through Q4. We’re possibly heading for the proverbial wobble again once we head into October on Brexit and/or trade talk ‘disappointments’. But, otherwise, we’re looking for fixed income to hold firm and credit spreads to tighten, yields to drop some more and returns to move higher still. If the ECB announces corporate bond purchases as part of the QE programme (likely), then we can expect the HY/IG compression to gain some fresh legs.


Fantastic primary

We had another excellent session in primary amid a glut of deals offering something for everyone. Of course, Dassault Systemes’ inaugural offering, via a 4-tranche took the headlines. The deal was rich and had a couple of negative-yielding tranches, but investor portfolios would have plenty of room for this first-time borrower. Combined books exceeded €10bn for the €3.65bn of issuance.

The borrower issued €900m in a 3-year at midswaps+40bp (-20bp versus IPT) and €700m in a 5-year at midswaps+48bp (-22bp versus IPT). They added a 7-year tranche also for €900m at midswaps+55bp (-25bp versus IPT) and a 10-year deal for €1.15bn at midswaps+60bp (-30bp versus IPT).

Dassualt was joined by Peugeot which went for an increased €600m in a 10-year at midswaps+140bp (-25bp versus IPT) with books above €1.4bn. Also in the market – and in line with the massive US corporate borrower activity in the euro markets – was Verizon which issued €800m in a long 12-year at midswaps+90bp and €500m in a 20-year at midswaps+135bp (both 15-20bp inside IPT, book over €2.5bn). They also issued £550m in a 11-year at G+135bp with books up at £1bn.

And finally, in IG non-financials, we had Coca-Cola European come in for €500m in a 12-year at midswaps+78bp, which was 22bp inside the opening guidance with books around 3.5x subscribed.

The sterling market also had deals from National Grid, for £300m in a 7-year G+100bp and for £400m at G+108bp in a 19-year maturity.

In financials, de Volksbank issued €500m in a green 5-year maturity senior preferred at midswaps+50bp off an order book at €1.7bn and priced 20bp inside the initial chat. Commerzbank took the same amount, the €500m print in a 5-year senior non-preferred format at midswaps+80bp. French insurer Groupama also transacted €500m in a 10-year Tier 2 offering at midswaps+240bp (-20bp versus IPT).

Something for everyone meant that we also had a high yield sector offering. That came courtesy of International Game’s €500m 8.5NC3.5 senior secured offering, priced to yield 2.375%. That was 37.5bp inside the initial mumble. Matterhorn Telecom is due on Tuesday with at least €600m in the offing.

When all put together, the focus will have been on the IG non-financials with the total for the month rising to €25bn, and heading inexorably for the €40bn mark for September. There’s plenty of time for it to get there. For the year so far, the counter goes up to €227bn. The record for any year is €285bn (in 2009) and it is also under threat.


Mixed markets open the week

A softer tone from PM Johnson on his trip to Ireland and UK GDP coming in better than expected for July saw Gilts come under a little bit of selling pressure and the 10-year yield popped 10bp higher to 0.60%. There were similar moves in other markets – for different reasons – with the 10-year Treasury yield jumping 7bp to 1.62%, while the Bund yield gained 6bp to -0.58%.

Equities though were more circumspect, barely moving in the session but in the black, nevertheless. The FTSE was the underperformer (-0.64%) after sterling gained over 0.5% (against the dollar) on those potentially easing Brexit no-deal tensions and the GDP print. US stocks were in moderately negative territory, as at the time of writing.

Credit index had iTraxx Main up at 47.9bp (+0.8bp) while the X-Over index edged 0.9bp higher to 239.4bp.

In cash, clearly we saw little by way of activity given the focus was squarely on that plethora of deals. And the IG market unsurprisingly closed unchanged to maybe better bid for choice, leaving the IG iBoxx index at B+122.9bp (-0.5bp) and the high yield index at B+414bp (-2bp).

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.