10th April 2018

Brushing the risks under the carpet

MARKET CLOSE:
iTraxx Main

57.1bp, -0.8bp

iTraxx X-Over

280.4bp, -4.2bp

10 Yr Bund

0.51%, +1bp

iBoxx Corp IG

B+106.3bp, -0.5bp

iBoxx Corp HY

B+326bp, -4bp

10 Yr US T-Bond

2.80%, +2bp

FTSE 100

,
DAX

,
S&P 500

,

Let’s worry not…

Judging by the level of the market, we would be forgiven in thinking that the immediate economic and geopolitical risks facing us are being viewed as background noise – again. We have had an extended period of market volatility from mid-February through to last week, as fresh event risk threw some uncertainty into the pot. However, just as we have faced a variety of potential banana skins over this past couple of years – which failed to derail the markets, there are a few more that we’re looking to see off in the same way. And judging by the last few sessions, it’s increasingly looking like we are going to trade through them as well.

The risks remain in the context of that US/China trade feud, the Middle East atrocity and the Western response to it – and then we just might be in the early throes of a potentially devastating economic slowdown in the Eurozone as evidenced by the recent crop of data emerging from the region (French and Italian industrial production the latest to disappoint).

The former is going to be all about months of headline risks until a clearer picture emerges on how the global trade dynamic will eventually play out. We were helped in Tuesday’s session by the tone of President Xi’s conciliatory words at the Boao Forum (so-called Asian Davos) as he talked about reducing car import tariffs, increasing imports and improving intellectual property protection. The Syrian situation is the most immediate serious risk that we face, with the US and its allies likely to react with force and/or with further severe economic sanctions.

As for the Eurozone, central bank policy response is going to be increasingly ineffective if it does turn out that Q4 was the peak of the latest economic cycle. Not that it was working one the ECB governing council has, as Nowotny suggested he would have no problem with raising the deposit rate from -0.4% to -0.2%. The euro currency jumped on the news and Eurozone government bond yields edged a touch higher. The ECB council members frequently comment – usually being careful with their language. And, of course, they want to get the financial community off the ‘QE drug’ to avoid it going cold turkey market reaction – so need to do it as gradually as possible. We have been warned!

So as we awaited that promised US (and its allies) response to the Syrian gas attack, safe-haven markets (government bonds) were stable to slightly better bid for choice. The Nowotny deposit rate comment saw to it that any early bid was reversed, however. European equities pushed higher, though, buoyed by the (eventually only slight) rise in US markets overnight. It helped that US futures were showing market opening sharply higher. Credit had much from primary to contend with, although we were faced with predominately sovereign and financial issuance with just a solitary non-financial IG borrower in the market.


Financials dominate primary

CK Hutchison was the only non-financial corporate in the market with a dual tranche offering. They took €750m in 7-year funding at midswaps+68bp which was 12bp inside the opening guidance. Hutchison also added €500m in a 12-year maturity at midswaps+93bp which was just 7bp inside the opening pricing gambit (combined booked were €2.1bn). So, after €4.65bn last week, we’re off with €1.25bn so far this week which takes the monthly total to €5.9bn with the market hoping for a good €30bn to help redress the balance higher after a poorer opening quarter of IG non-financial issuance.

However, financials and SSA deals dominated. UBS lifted €1.75bn in a 7NC6 senior structure priced at midswaps+75bp (-10bp versus IPT) while BNP went for a green bond for €500m at midswaps+55bp in a 6-year maturity. The state-owned Bank of China rounded off the senior deals with a €700m, 3-year floater at midswaps+50bp (-15bp versus IPT). Caixabank wrapped up the plain vanilla corporate deals with a 12NC7 Tier 2 deal for €1bn priced at midswaps+168bp (-12bp versus IPT). That’s €3.75bn this month so far for senior deals (non-state owned banks) and €54.5bn year to date.

Senior Financials Monthly Supply

The high yield market drew another blank, and the euro-denominated market is without a deal since 23 March when Corestates Capital was in the market. The pipeline is bulging with the promise of a flood of transactions to come.

Of note in the SSA space, we had the Province of Ontario lift €1.5bn in a 7-year at midswaps+2bp (books €2.3bn) and Ireland, back for the second time this year, take away €4bn in a 15-year transaction costing them midswaps+4bp. The order books here being in excess of €12.5bn.


Risk asset prices surge

European stocks put on some 1% in the session, while (at the time of writing) the US market was zooming higher and up to 2% higher. As a result, the S&P and Dow indices were fighting to get back in the black for the year, but late afternoon trading had them still falling a little short.

Rates only lost the smallest amount of ground. Ten year Gilt yields were unchanged at 1.41%, the Bund yield up at 0.51% (+1%) and the equivalent maturity US Treasury at 2.79% (+1bp).

In line with the risk-on elsewhere, credit protection costs were only going one way – and was better offered (lower). So the iTraxx indices moved to 57.1bp (-0.8bp) for Main and X-Over dipped to 4.2bp to 280.4bp.

In cash, primary was the focus but we did edge tighter in secondary, and this left the Markit iBoxx cash index for IG at B+106.3bp (-0.5bp) while the high yield market was also in better shape and that left the index at B+326bp (-4bp).

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.