17th July 2018

Holidays are coming, really!

MARKET CLOSE:
iTraxx Main

63.9bp, +0.4bp

iTraxx X-Over

289.9bp, +1.5bp

🇩🇪 10 Yr Bund

0.35%, -2bp

iBoxx Corp IG

B+130.4bp, +0.5bp

iBoxx Corp HY

B+389.7bp, +1.5bp

🇺🇸 10 Yr US T-Bond

2.86%, unchanged

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Summertime blues…

It’s not getting any better in terms of activity – while the rest of the market is going sideways in terms of pricing. Admittedly, there was an uptick in issuance in the session, but mostly it was financials and covered bonds. There is an eerie disquiet around the plain vanilla non-financial IG corporate bond sector. These borrowers are probably mostly done until September.

The headline risks in the session were quite limited, save for a continued heap of warnings about how a non-deal Brexit would unleash irreparable decline in the UK economy (just like to doomsayers were warning pre-referendum). No matter, sterling assets didn’t really step out of line versus other markets with equity and rate markets all moving in tandem in the day.

It’s good, though, that credit is generally beginning to feel a slightly better bid. Spreads in IG are wider by 40bp this year but the anticipated devastation of higher underlying rates on total returns hasn’t happened. IG total returns, as measured by the iBoxx index are at just -0.35%, which is very decent given the volatility, weakness being witnessed in say equities amid the high level of geopolitical and macro event risk. The sterling market has seen spreads widen by 30bp in the index (outperformed euro-denominated IG credit), but returns are at a more disappointing -1.5% given that this longer duration corporate bond market (around 8-years) hasn’t felt the benefit of a rallying Gilt market.

The high yield market has returned -0.55% so far this year on spreads 100bp wider, as measured by the iBoxx HY index. Spreads have been 130bp wider at their worst point this year. Interestingly, we haven’t felt the carnage that one might have expected for such a considerable widening, and we have taken down a record run rate in supply (over €40bn) in the process. The weakness in secondary has not come because of the higher level of issuance – the spread widening driven more by macro (equity market) jitters – but we have failed largely, to recover when the going has improved. Few are chasing the secondary market, preferring to take down ‘cheaper’ deals in primary.

That lack of a recovery in the spread dynamic is evident across the corporate bond market, even as the ECB has been sucking up €4bn (currently) of IG non-financial corporate debt per month (€163bn+ overall since June 2016). And primary overall has been lighter than usual – actually at the lowest level overall- since 2012. Couple that with the sidelined cash where many portfolios are limit long cash, we should be at or close to those record tight levels seen in 2017. With macro risks set to escalate into that trade war, credit is unlikely going, therefore, to see much more upside – the best we might get is into the low B+120bp area in the IG index, come September. And we will stay rangebound into year-end (B+120/5bp say – B+140bp) as the potential repercussions of the trade war grip the market.


Financials rule in primary

The corporate bond deals were in the financial sector. So, in the last 8 days, we have had just VW and Terna issue in the IG non-financial sector, while the session’s deal flow on Tuesday added €2.25bn to the senior supply total, taking the monthly total past the €10bn mark.

Those senior deals came from Citigroup for €1.75bn in an 8NC7 issue at midswaps+100bp, which was 10bp inside the initial price guidance with order books approaching €4bn. And Sumitomo Mitsui (SMFG) followed with a €500m offering in a 5-year maturity at midswaps+55bp – and also 10bp inside the opening guidance but off a book of just €850m.

We had Blackstone Property Partners take €650m in a 7-year at midswaps+170bp with 15bp taken off the initial guidance off a book of €1.5bn. In sterling, Investec Bank issued subordinated debt, lifting £420m in a 10NC5 Tier 2 structure at G+330bp (-20bp versus IPT).

Late into the day, Altice priced €1bn of an 8.5NC3.5 structure to yield 5.875%, bringing up a deal for the high yield sector.


Equities boosted by Powell testimony

There was little excitement in the market, save for sterling being sharply lower with the UK government thought set to lose a vital Brexit vote (keeping the UK in a customs union if no deal is reached). For once, that didn’t really help push UK equities any higher. In line with slightly better data elsewhere (in the Eurozone), US industrial production for June rebounded to o.6% month-on-month, and against that 0.5% decline in May. The markets didn’t really react to this either, focused a little more by Fed Chair Powell’s congress testimony.

In the event, Powell struck an upbeat tone on the economy (with rate hikes to proceed as planned), and we managed a late rally in European stocks with the DAX up 0.8%, the FTSE just 0.3% but most markets were in the black having been mixed before the remarks. In the US we’re only marginally higher (at the time of writing).

So, we had rate markets edging a touch higher (price) and yields generally were a little lower. The 10-year Bund yield declined 2bp to 0.35% and the equivalent maturity Gilt the same, to 1.26%. US Treasuries barely moved with the 10-year yielding 2.86% (unchanged) and the 2-year 2.61%.

The synthetic indices played out to the initial cautious tone reflected in equities, leaving iTraxx Main around 0.4bp higher at 63.9bp and X-Over up at 289.9bp (+1.5bp).

The Markit iBoxx IG cash index moved just a half a basis point higher (noise, really) to B+130.4bp in a lacklustre session reflecting the current, more limited need or willingness to get involved in the market. The high yield market was similarly fairly limited in how it traded the session although in primary Altice priced that €1bn, NC3.5 at 5.875% alongside a $1.75bn of dollar debt. The iBoxx HY cash index closed at B+389.7bp (+1.5bp).

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.