30th November 2016

Mama mia!

MARKET CLOSE:
FTSE 100
6,772, -27
DAX
10,620, +38
S&P 500
2,205, +3
iTraxx Main
80bp, -1bp
iTraxx X-Over Index
340bp, -1bp
10 Yr Bund
0.22%, +2bp
iBoxx Corp IG
B+141.3bp, unchanged 
iBoxx Corp HY Index
B+448.5bp, -3bp
10 Yr US T-Bond
2.31%, -0.5bp

Ciao Renzi…

Current Italian PM Matteo Renzi

A few deals kept the corporate market’s investor community occupied in an otherwise lacklustre session where some will be thinking about winding it down for this year. It wasn’t exactly a deal flurry in yesterday’s session, but four was the number in IG non-financials while four borrowers were on the scene in the FIG space.

There is an element of squeezing them in before this weekend’s vote in Italy. With the market already defensive, spreads will see further weakness. It has not been difficult to sell, which means positions are being rotated quite easily. €2bn of that is going into the ECB’s coffers. But the weakness in the Street’s bid smacks of a very defensive bias. We are all aware they are not operating like the “shock absorber” of old.

But that Italian constitutional reform referendum which is coming up on Sunday – a defacto election on Renzi’s reign – as well as various EU politicians (and Draghi) sounding off about Brexit – have unnerved investors so close to the finishing line for 2016. The €26bn+ of issuance this month has created additional pressure on spreads, in a market which was already weak from the uncertainty around the rates market.

As for Italian risk, the next step for valuations here is binary. Paper has been battered of late. A “No” vote and Renzi stepping down will unleash more weakness. A “No” vote and Renzi deciding to stay and we could get a significant rally. Take your position. An unlikely “Yes” vote sees us to the finishing line in style!

So reports have suggested that the manipulative arm of the ECB has been – or will be – buying BTPs ahead of the vote on Sunday. Their excuse is to minimise market disruption into a possible “No” vote. BTP yields fell in the session and were back through 2% in 10-years, also being the best performers of the day.

As mentioned above we’ve also seen Italian corporate risk come under immense pressure. For example, the ENI 28s have widened 65bp off their lows in the last four months, Generali’s 5% of 2048 are down 4 points in the last four weeks, while the Hera 26s have widened 35bp and the SRGIM 23s some 50bp in the last six weeks. These could gap tighter or move decidedly wider from these levels come next week. Renzi will call the shots.

Primary/secondary market split continues

Česká telekomunikační

€650m deal: Česká Telekomunikační

Secondary spreads remain under pressure, but the primary market is relatively buoyant. Yesterday’s issuance took in Bouygues – some 20bp inside the initial price talk for €750m – on a book almost 4x oversubscribed. Česká Telekomunikační managed to lop 15bp off initial guidance with a €625m 5-year deal, while Laxness satiated the need of IG yield-hogs with a €500m hybrid 60NC6.5 structure – though this deal will be rated Ba2/BB.

The German housing association group, Vonovia Finance, took €1bn in 8-year funding. All the aforementioned borrowers are infrequent and the Laxness hybrid structure has also been used fairly sparingly of late.

In financials, Morgan Stanley issued €2.25bn in a 2-tranche offering, Euroclear Investments’ 10-year deal was for €600m, Great-West Lifeco sold €500m of debt in a 10-year.

Total supply this week falls just short of €5bn in non-financials and we are up at €26.6bn for the month with just today’s session left. It’s probably too much to expect the €30bn mark to be reached by the close of business for November.

Uncertainty in the air

We’re closing out the month in uncertain fashion. It has been weak and volatile for most risk assets classes – even after some got bit of a fillip following Donald Trump’s US election victory. The euphoria around that victory has waned (higher spending, boost to growth etc), but we’re into difficult territory again as we head into that crucial Italian referendum. On the news flow front, we had to contend with a revised US GDP number – up at 3.2% versus 3.0%, as well as a stunning US Conference Board consumer confidence index number (the highest for over a decade). The US is going great guns and a rate hike is coming in December.

In Europe, BTPs outperformed in government bonds, with the 10-year yield plummeting by 12bp to 1.94%. The equivalent-maturity Bund yield was higher at 0.22% (+2bp) while the Gilt was left at 1.37% (-1bp). OATs have been under pressure of late but also staged an excellent recovery, allowing the 10-year yield to drop 7bp to 0.7%. Equities didn’t have a particularly exciting session, closing a small up across the board – except for the FTSE.

In the secondary corporate bond market, supply, rate jitters and the Italian referendum continue to weigh on sentiment. IG spreads were just a little wider in a session where the market was better offered and few were willing to step in just yet. It might be different come Monday as underweight positions (especially in peripheral risk) will need to get filled. There will be little offer-side liquidity. Sterling played out the same way. It wasn’t very exciting.

iTraxx Main closed at 80bp and X-0ver at 340bp, both a basis point lower. As for the cash high yield market, it was better bid and spreads edged tighter. The Markit iBoxx index was lower at as a consequence at B+448.5bp. That’s a good note to end on.

Have a good day. Back tomorrow.

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.