12th January 2020

Kitchen sinking it

MARKET CLOSE:
iTraxx Main

43.1bp, +0.2bp

iTraxx X-Over

204.9bp, +1.1bp

🇩🇪 10 Yr Bund

-0.24%, -1bp

iBoxx Corp IG

B+105.4bp, unchanged

iBoxx Corp HY

B+344bp, -3bp

🇺🇸 10 Yr US T-Bond

1.81%, -4bp

🇬🇧 FTSE 100

7436.64, (-0.58%)
🇩🇪 DAX

13664.00, (-0.91%)
🇺🇸 S&P 500

3373.23, (-0.70%)

Easing in tensions boosts markets…

Borrowers are throwing the kitchen sink at it. There’s like a big black hole absorbing anything and everything that comes its way. There doesn’t appear to any repricing risk in the near term as the early year exuberance from borrowers and investors alike satisfy both sides of the equation.

This is a classic new year dynamic playing out to perfection. IG non-financial issuance can hit €40bn and senior deal volume can exceed €30bn – currently at €11.25bn and €16.5bn, respectively, without any repricing moves. Of course, it helps that equities are setting record highs more often than not in the US, and that we are in a de-escalation period following that US/Iran trouble while also waiting for that ‘phase 1’ deal between the US/China to be signed.

Even during the heat of the battle and the heated rhetoric which followed, credit markets displayed a high level of calm. We had some very moderate pressure on IG spreads but that because valuations are rich and they were likely giving back some of the unwarranted tightening observed into the final couple of weeks of 2019.

Higher yielding assets were unmoved. There was no sign of panic and investors were instead looking to get more risk on board. After all, the receptivity to the AT1 and Tier 2 issued last week was excellent with books significantly oversubscribed. These asset classes are seen as outperformers this year as positioning for compression between high and low beta risk will be this year’s trade of choice.


Primary’s gluttonous period set to continue

It’s not totally unusual, but we had several deals on Friday – rounding off an excellent week for the primary market. There’s most likely been an element of ‘get a deal in quick’ before another event closes the window, but we think most likely the market was ready to go very quickly in the new year with borrowers and investors alike extremely keen.

Those deals came in IG non-financials with APRR SA issuing €500m in a 3-year at midswaps+18bp which was 22bp inside the initial guidance on books up at €2.8bn. In the high yield market, Air France-KLM printed €750m in a 5-year which was priced to yield 2%, where books in excess of €3bn saw pricing drop by 37.5bp versus the opening salvo.

The other deal was a Tier 2 offering for €1bn from BBVA which priced at B+127bp (-28bp versus IPT), with demand for the transaction not far off €4bn.

The key takeaways for last week were the massive levels of issuance, the huge demand and the performance on the follow where most were trading inside reoffer levels. The market can – and will, easily absorb much more through this month and the quarter – judging by the receptivity to the deals. Investors are geared up to embrace the heavy level of transactions.

January Investment Grade Non-Financial Issuance

In IG non-financials, €11.25bn was issued. Usually, January records around €25bn but we think this year will exceed that level by some margin and possibly see us take down around €35bn for the month.

The three HY borrowers last week took down around €3bn which compares with €5bn issued for the whole of January last year. The pipeline is fairly decent and we could easily absorb up to €8bn without much of an impact to secondary levels. Our full-year target is bullish and we look for a possible record in the range of €75-€80bn against the current record annual total of €76bn seen in 2019.

The story so far, though, has been the volume of senior financial issuance. There’s been a glut of deals (16 issues). We might not surpass the €42bn issued in January 2015, but the €16.25bn printed so far should rise to over €30bn without too much difficulty.


US payrolls miss, but no hardship

The US non-farms report showed that the economy had added 145,000 jobs in December, which was lower than the 164k consensus expectations. The unemployment rate was unchanged at 3.5% but the average hourly earnings grew by only 0.1% month on month versus the 0.3% growth expected. So overall, the report was a little weaker than anticipated but we think it keeps markets taking-over nicely for now.

The data gave a bid to rates and a better offered rate market turned slightly better into the final afternoon session. The 10-year US Treasury yield closed at 1.81% (-4bp) and the Bund was up a touch in price to yield -0.24% (-1bp) having seen -0.20% earlier. Gilts also gained some favour and the yield dropped to 0.77% (-5bp) at the close of play. Equities eventually closed a small in the red having dipped in and out of positive territory for most of the day.

The iTraxx indices didn’t do too much, save for edge a touch higher motivated by the weakness in stocks. iTraxx Main closed at 43.1bp (+0.2bp) and X-Over edged to 204.9bp (+1.1bp)  IG cash credit though closed the session unchanged. The index is at B+105.4bp – which is also unchanged for the week, following some moderate recovery midweek onwards as risk markets generally started to recover their poise.

The lack of any material movement is a good sign and if tensions across the Middle East do continue to subside, the omens are good for tightening through that B+100bp level over the next few weeks. Gushing primary might check the trend tighter.

The higher yielding markets have held firm, as suggested earlier. The AT1 market has had a deal or two already this year which have met with great demand while the index has also tightened – by 24bp this year so far to B+373bp. That’s the tightest level since March 2018 and we are only 85bp away from the record low seen in January that year. It could get there given the demand for the product and sentiment towards the banking sector for this year.

And, in high yield, few seem to be exhibiting the same concerns for the risk that they had in 2019. Nothing has changed on macro, but high yield corporate risk is pretty well bid. The index is unchanged at B+344bp this year but that’s against equity volatility which has not fed into any volatility in spreads here.

As for this week, there will be focus on the developing situation in Iran, but we are light on market-moving economic reports. We have US inflation data (CPI and PPI) for December as well from the Eurozone along with Chinese GDP, industrial production and fixed asset investment at the end of the week.

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.