30th September 2018

🇮🇹 Here we go again!!

MARKET CLOSE:
iTraxx Main

68.2bp, +1.1bp

iTraxx X-Over

273bp, +5.9bp

🇩🇪 10 Yr Bund

0.47%, -6bp

iBoxx Corp IG

B+130.6bp, +1bp

iBoxx Corp HY

B+385.6bp, +9bp

🇺🇸 10 Yr US T-Bond

3.04%, -1bp

🇬🇧 FTSE 100 6090.04, -108.90 🇩🇪 DAX 12901.34, ERROR 🇺🇸 S&P 500 3372.85, ERROR

Mamma mia… routed…

The markets were well-shaken out of their complacency during a torrid final session of the third quarter. Up until that point (just about), the markets had managed to swat aside the many potential banana skins which had come their way. They have learned to live with Trump, good levels of economic growth in the US have boosted sentiment and helped US equities to record levels, while Turkey succumbed to an orthodox economic policy response to help support its currency.

Events were rumbling for a few days around the Italian budget with rumours of the resignation of the technocratic finance minister before finally we had the populist parties make good on some of their (election) promises. As the fiscal sluice gates opened, the market fretted. And a decent/good month for risk assets turned into a flat/poor one.

At the worst point, Italian stocks fell by around 5% (closed 3.4% lower), the DAX stumbled and then tumbled by as much as 1.8% (ended 1.5% down), BTPs were hammered  (10-year yield rose as much as 37bp) while safe-havens alone were in the ascendancy.

So the markets were feeling soggy and some would suggest that, in reality, they will settle – as it is just an Italian problem. Unfortunately, these events can sometimes spiral out of control – and it might not be only an “Italian problem” for too much longer. The EU will be watching.

Nevertheless, just as well that Italian-induced risk-off session on Friday came when it did – for fixed income investors. Better late than never! The country’s government had agreed a budget with bigger than expected spending plans – and a projected budget deficit of 2.4%. A deficit in the region of 1.8% – 2.2% would have assuaged the markets worst fears.

We witnessed a very strong bid for safe-havens and that would have been a welcome shot in the arm for all those fixed income total return investors. They were having a bit of a torrid month as markets had spent much of September under pressure, with yields heading north for much of it. The retrenchment in yields helped to boost total returns (see below).

Credit/equity was under pressure though along the Italian corporate markets (especially financials reflecting the still extremely fragile nature of the banking system) and few will be adding in the subordinated debt market even as the AT1 sector comes under only slight pressure. Italian bank stocks took a pounding in the session, though.

Bund yields fell by 6bp in the 10-year to close the month at 0.47% while Gilt yields declined to 1.57% (-3bp) just as 10-year BTPs closed to yield 3.15% (+25bp). The 2018 high is 3.38% while the day’s highest point was 3.26%.


Primary market came back from the dead

IG primary had a very good September and wronged some of the imbalances in supply that had built up during the year. So, following on from an excellent August, September’s €33.3bn of deals was the best month since June 2017 for IG non-financial issuance. In all, we had 48 individual issues taking the year to end September total to a slightly more respectable looking €176.3bn.

We are still some €34bn short of the level for the same period in 2017 (€210bn). It is unlikely that we now get to the average of the 2014 – 2017 period which would mean close to €90bn of deals would be needed in the final quarter. That’s a tough ask and we would be in record territory for Q4 issuance if we managed it. However, we ought to be looking at a target level of round the €230bn level for the full year.

French borrowers took first prize as the led the pack for issuance in September with 34% of the deal flow, followed by US corporates at 17.5% of the month’s total. However, German corporates come out tops and are responsible for 26.3% of the total issuance so far this year, while French borrowers are on 23.5%. That’s just about in line with the long term trend. US issuers have printed 10.7% of the total euro-denominated, non-financial total in the year to end September.

Issuance 2018 by country:

In high yield, a late month-end flurry took us to €7.6bn of issuance for the month and to €55.8bn of deals for the year to end September. We’re now less than €20bn short of setting a new annual record for issuance (€75bn is the target).

The high yield pipeline remains rammed and we could well see that €20bn of deal flow or more get done in the final quarter. For us to get there though, we need economic and geopolitical event risk to play ball. Confidence, rising/stable equities and reduced levels macro uncertainty will be needed to get us over the line.

We had a steady stream of deals from the senior sector in September, but still only managed €11.1bn of issuance. We’re up at €112.5bn for the year so far. It would seem that somewhere of the order of €140bn – €150bn for the full-year should be achievable, in a market that is fairly unexciting.


Confidence is everything

As for the monthly performance, fixed income has been in the ascendancy all year – in Europe anyway. The asset class has been a solid defensive investment.

In September, IG credit returned -0.3%, high yield credit +0.1% and sterling corporate credit has lost 1%. The FTSE was up 1%, the DAX off by 1.5% and the €Stoxx50 up 0.25%. For the year to end September, IG euro-denominated credit has returned -0.7% and high yield credit -0.1% (all iBoxx), while the longer-duration nature of the sterling corporate market has seen it suffer 2% losses. The Eurozone sovereign index lost just 0.2% in September and is lower by just 0.5% in the opening period to end September in 2018.

YTD Returns

For benchmark investors, IG spreads as measured by the iBoxx index tightened by 5bp in September but are 43bp wider in the first nine months, coming after the 10bp of weakness in spreads in the index in August. For all the political travails in the UK, the sterling corporate market closed the month with spreads just 0.5bp wider (essentially unchanged) at G+156.7bp – and that comes after a decent level of issuance especially through August that seems to have been well absorbed.

After some early weakness in spreads at the beginning of September (and in the final session!), the high yield market staged a moderate recovery and spreads eventually tightened by 13bp in the index, closing at B+385.6bp.

Compared to equities, the FTSE is off 2.3% in the first nine months of this year, the DAX a whopping 5.1% lower and the €Stoxx50 3% lower.

Then there is the US, which seems to be in a world of its own. Stocks there have been in good form – for most of the year, and are ripping higher. For instance, in September they outperformed with the S&P up 0.4% while the Dow was higher by 1.9%. Both indices saw record highs during the month. For the year to date, the performance is very impressive with the Dow index higher by 7% and the S&P up 9%.

As for this week, we end with the non-farms report (190k expectations/unemployment rate to fall to 3.8%) while in the UK, the focus is going to be on the Conservative Party conference. New issues? The market will be looking for a decent amount of issuance – but we’re going to need stability in macro and geopolitics to make sure the window remains open.

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.