26th September 2017

Into the home straight

MARKET CLOSE:
iTraxx Main

58.3bp, -0.4bp

iTraxx X-Over

256.8bp, -2.8bp

10 Yr Bund

0.41%, +1bp

iBoxx Corp IG

B+107.8bp, unchanged

iBoxx Corp HY

B+285.8bp, -1bp

10 Yr US T-Bond

2.24%, +2bp

FTSE 100

7,286, -16

DAX

12,605, +10

S&P 500

2,497, unchanged

We’ve seen them all off…

Having seen off Brexit, French and UK elections, Trump’s many verbal altercations and now the German election result, are we taking stock of the outlook as we close out the third quarter? It certainly feels that way with little really happening through what is normally one of the more bullish month for risk assets.

The tone feels a little cautious and the markets seems a little wary, but not uneasy enough to act on its concerns and sell off. The markets are left treading water, so to say. We’re kind of in the clear until year-end, but with US President shenanigans on the domestic front and US/North Korean ones on the geopolitical side, we are left still with two big known unknowns through the next quarter.

In credit, investors are not necessarily playing it safe. The rising oil price is an added bonus to the HY market where shale gas producer troubles are off the front pages and should serve to further underpin sentiment and demand for this asset class. That will feed through into the euro-denominated HY markets and we can expect valuations to creep higher (spreads tighter) while this remains the case. There is still an overall willingness to add risk, but the deal flow has been ‘bitty’ again as we lack a steady daily stream of non-financial borrowers. And here, once again, we think that the ECB’s effort to directly support a greater level of corporate bond issuance through manipulating the secondary market (tighter) has actually failed.

That is, the overall level of issuance from IG non-financial borrowers has not risen in any noticeable way. The year-to-date level of supply for IG non-financials is at €205bn with effectively a couple of months in which to get some serious business away. Knowing that the ECB will soon be tapering their asset purchases leading directly (probably) to higher funding costs as rate markets back up, but also indirectly if tapering includes a reduction in monthly corporate bond-related QE purchases – then corporates ought to be scurrying around getting their funding done.

But they’re not. With that €205bn so far, we must be looking at topping out on supply in IG at around €260bn for the full year – and that’s assuming that the October and November windows are not slammed shut on any geopolitical malaise. And that level of primary is no record.

It could be that corporates are so cash rich that any additional funding (before costs rise) will only have an overall marginal impact on their treasury operations. So they are prepared to wait until they need to print. Perhaps there is something to Draghi’s QE corporate bond madness in the HY market, where the year to date supply total is €48bn.

The secondary impact of that QE has clearly compressed spreads in this market and funding costs with it. The record came a few years ago, when €57bn of deals came in the euro-denominated HY market. We might just beat that – assuming again we can get through a largely event-risk free final quarter.


Treading water

John Deere Bank: €500m deal

Equities were generally residing in the black through the session, but without any zest to want to push on. And news flow was light enough for investors to remain sidelined. Rate markets were likewise inactive with yields moving in a +/-2bp range throughout the day. As it happened, 10-year Gilts closed to yield 1.33% (unchanged), the Bund 0.41% (+1bp) and the US 10-year Treasury 2.24% (+2bp).

For primary, it was fairly slim pickings. IG non-financial corporates had Aussie group Brambles to represent them as they priced a €500m 10-year issue at midswaps+70bp which was 20bp inside the opening price indication. The deal was followed by John Deere Bank which priced a 5-year floater at Euribor+27bp for €500m.

The remainder of the deal flow was also financials, taking in an AT1 issue for Banco Santander paying 5.25% on €1bn, while Leaseplan issued a 5-year deal at midswaps+60bp for €750m and Standard Chartered took a combined €1.25bn split as €750m in a 6NC5 deal and added €500m in a 10NC9 offering.

And in credit, after the close we had Finland’s Fortum make an €8bn bid for Uniper which will likely have repercussions for Fortum’s credit quality depending on its eventual success and financing structure. Fortum’s CDS might move more immediately. For the indices, Main edged lower to 58.3bp (-0.4bp) and X-Over to 256.8bp (-2.8bp).

In cash, a lacklustre session left investment grade spreads unchanged and the Markit iBoxx index at B+107.8bp. Sterling IG corporates were better bid though and this left the iBoxx corporate index at B+134.5bp (-0.5bp) and it is now 1.5bp tighter for the month so far although September’s total returns performance for IG sterling corporate is a negative 1.8% on the back of the Gilt market sell-off.

And finally, high yield credit was a little better, which was to be expected given we had little by way of flow but equities were a touch higher – and so risk was marked better, for choice. The iBoxx index was asked at B+285.8bp (-1bp).

Have a good day.


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

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.