21st May 2019

Luv’ it, just luv’ it!

MARKET CLOSE:
iTraxx Main

65.0bp, -1.6bp

iTraxx X-Over

278.1bp, -6bp

🇩🇪 10 Yr Bund

-0.06%, +3bp

iBoxx Corp IG

B+135.1bp, unchanged 

iBoxx Corp HY

B+434bp, -3bp

🇺🇸 10 Yr US T-Bond

2.43%, +1bp

🇬🇧 FTSE 100 6292.65, (+1.83%) 🇩🇪 DAX 12930.98, (+1.84%) 🇺🇸 S&P 500 3226.56, (+0.92%)

Credit in a class of its own…

Resilience comes to mind when offering a description of the corporate bond market at the moment. Equities might move higher or lower by up to 1.5% in a session as they react to the headline risks, but without a bigger down-leg, credit (at worst) just treads water or edges a little wider. The corporate bond market is holding firm at the moment as it trades into some kind of Goldilocks macro environment that helps this fixed income asset class which offers a better return than government bonds.

The excess pick-up is usually positive, even at the front-end (Bund yields negative out to 10-years) but it still isn’t great although we take it given the low-interest world that we occupy. Macro is unlikely going to change to see anything different (that is, higher rates) anytime soon. So we just keep clipping those (tiny) coupons.

Economic recovery will change things, though. Rest assured, that isn’t around the corner. This China spat is brewing into something much more serious than anyone would have hoped or wanted and the risks are to the downside. The German Bundesbank recognised as much in a warning earlier this week and doesn’t anticipate any upside for the domestic economy in the second half.

It’s the growth engine for the whole Eurozone, so the outlook isn’t bright as Italian politics and economics, the EU elections, uncertainty over Brexit and the US/Iran situation all add to the sense of gloom. Draghi and his cohorts must be considering their next response such that we must soon be looking at additional accommodation (than already announced) in policy, if only so growth limps over the line by year-end without us falling into recession.

Asset allocation keeps credit in the ascendancy, offering a level of safety and hitherto good returns (for example 7% AT1 market YTD, iBoxx) keeping the interest at elevated levels, we would proffer. There are inflows, investors already sit on decent levels of cash and it all needs a home.

Primary has generally been kinder than we might have expected, especially after last year’s high market volatility affected levels. Just €220bn of IG non-financial debt was issued in 2018 (average of €250bn in the previous four years, 2014-2017) but this year, as we head into the end of May, we’re already at over €120bn.

And there is no ECB competing for paper with funding costs close to historic lows, meaning we’ve got all this performance/supply without the direct assistance (through corporate QE) of the central bank.


Primary sluice gates open

After the day’s delivery of deals, and they were numerous, we could do with a bit of respite just to absorb them before the next batch. Deep breath, the deals came from Vodafone, Becton Dickinson & Co, Thales in IG non-financials with BNP Societe Generale, Commerzbank, Nordea and AIB Group all representing the senior financial sector.

So, in the IG non-financial corporate market Vodafone kicked us off with a 3-tranche which included a green bond. They took €750m in a 7.5-year maturity green bond priced at midswaps+75bp. This was followed by an 11.5-year maturity, €1bn tranche at midswaps+112bp and then with a 20-year, €750m tranche at midswaps+160bp. The combined books came in at a hefty €8bn and final pricing for the deals was 18-25bp inside the initial guidance across the tranches.

Becton Dickinson also came in with a 3-tranche deal. They took €600m in a 2-year at midswaps+42bp, 4-year funding at midswaps+75bp for €800m and a 7-year maturity deal for €600m at midswaps+105bp. Final books exceeded €6.5bn and final pricing was 20-23bp inside the opening salvo. Thales bought up the rear, with a €500m offering in a 3-year maturity at midswaps+15bp.

As for senior financials, Societe Generale printed €1.5bn of a 3-year senior non-preferred at midswaps+27bp (-13bp versus IPT), Commerzbank took €1.25bn in a long 5-year senior preferred at midswaps+68bp and BNP issued in a 10-year maturity also in senior non-preferred format for €1.25bn at midswaps+105bp (-120bp versus IPT).

Ireland’s AIB Group issued at the HoldCo level for €750m in a 5-year at midswaps+140bp (-20bp versus IPT)). The green bond issue came from Nordea, which offered €750m at midswaps+32bp in a 7-year senior preferred. HSBC issued in sterling, lifting £750m in an 11NC10 structure at G+200bp (-10bp versus IPT).

That deluge of deals took in €5.5bn of senior bank issuance and €5bn of IG non-financial offerings. For May to date, the latter’s deal total is now up at €24bn and we should get in excess of €30bn – perhaps close to €40bn, before the month is out – as shown here:


Not ebullient, but positive nevertheless

Primary was the complete focus of investors in the credit markets, but they were able to give the market its full attention because equities were in positive territory. Stress-free. Fortunately, there wasn’t too much to distract elsewhere. If anything, after the markets closed, Theresa May was busy offering another referendum in a last ditch desperate move to get her Withdrawal Bill through Parliament.

Rates gave up a little, the 10-year benchmark Bund yield rising to -0.06% (+3bp) with a similar move in the 10-year Gilt yield to 1.09%. In the US, the Treasury yield backed up, too, the 10-year left at 2.43% (+1bp).

As suggested, equities were in positive territory through the session, with the Dax up by 0.9% while the FTSE rose by 0.25% as sterling fell below $1.27 at one stage – before moving higher on the prospect of that second UK Brexit referendum. As at the time of writing, the US markets were higher by up to 1%.

The recovery – or rather better tone in equities – fed through into credit across the synthetic market (lower protection costs) and tighter spreads in cash. That saw iTraxx Main at 65bp (-1.6bp) and X-Over at 278.1bp (-6bp).

Secondary credit spreads held firm into Monday’s weakness and they were pretty much doing the same despite the improved tone on Tuesday. An effusive primary market likely didn’t help. The iBoxx IG cash index was left at B+135.1bp (-0.2bp).

There wasn’t too much happening elsewhere either, and the AT1 market was likewise unchanged while in high yield the cash iBoxx index edged a tough tighter, closing at B+434bp and helped by higher equities.

Have a good day.

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.