5th November 2018

Mid-terms stifle activity

iTraxx Main

69.8bp, -0.7bp

iTraxx X-Over

288bp, -0.2bp

🇩🇪 10 Yr Bund

0.43%, unchanged 

iBoxx Corp IG


iBoxx Corp HY


🇺🇸 10 Yr US T-Bond

3.20%, -1bp

🇬🇧 FTSE 100

7,328.54, (-0.42%)
🇩🇪 DAX

13228.56, (-0.23%)
🇺🇸 S&P 500

3093.08, (-0.21%)

Steadying the ship…

Let’ see what the US mid-term elections brings. It was a mixed and perhaps apprehensive start to the week, but at least we had some signs of life in the primary corporate bond market. Several borrowers emerged from the debris of the past few weeks. We have five weeks left in reality in which to get some good business done, needed in a primary market which has generally failed to deliver this year. But primary can only pick up in a material way if the tea leaves elsewhere are lined up. Otherwise, the deal flow is going to come in fits and starts, just as it has done for much of 2018.

At least the bottom hasn’t fallen out of the spread market. Admittedly, secondary market liquidity is shot to pieces and seasoned market participants will always have their gripe about it. The financial crisis and the subsequent reallocation of expensive capital for banks means liquidity provision is going to be scarce.

The good old days were just that. Much will depend on who the investor is (size will matter) and the relationship with the bank prepared to provide the liquidity and facilitate a trade. For everyone else, it’s about being lucky – that the Street can find the other side of the trade.

Spreads are wider this year, and its +47bp on the iBoxx IG cash index – or 45% wider – which looks rather unappetising. However, the recent volatility in equities and rates has been less contagious in secondary cash credit. We are at around the widest point in spreads on the cash index this year at B+144bp, and 14bp came in October but just 6bp wider versus September. It’s been choppy but we have leaked wider on a consistent basis. We saw the record tights on the index, B+83bp in February but failed to hold those gains through a year ravaged by headline/event risk on both the macro and geopolitical scenes.

We haven’t really recovered much when the going has been good (July did see 12bp of tightening and May saw 25bp of widening). And that might be a concern. Few, that is, have chased secondary through the year. The ECB has done all the heavy lifting (added over €172bn of IG non-financial debt/21% of the market), leaving the rest needing to be content to try their luck in the primary market.

ECB retains a steady hand…

The central bank lifted €727m of IG non-financial debt during the last week versus €801m the week before and against an average weekly haul of around €750m since the beginning of October.

The central bank is likely on a higher than expected monthly trajectory of €3bn of purchases, and possibly through to the end of December. That is more than we expected and must be contributing to containing any spread weakness – and will continue to do so, through to year-end helped also by the reduced supply.

ECB weekly corporate bond purchases

The total purchases to date, after 125 weeks of market activity, stand at €174,184m with the long-term weekly average purchases declining a touch yet again to €1,393m. The ECB has accumulated 21% of the eligible market.

A bit of this and that

Three business days in, and we had the first IG deals of the month in the session. The deal flow took in Nordic telecom group Tele2‘s dual-tranche offering for €500m in a 5.5-year and €500m in a 9.5-year priced at midswaps+80bp and midswaps+130bp, both around 10bp tighter than the initial guidance on combined books of over €2bn. The other non-financial IG deal came courtesy of Coca-Cola European Partners, which took €400m in a 9-year at midswaps+70 (-15bp versus IPT) off a €1.2bn book.

The €1.4bn issued takes us past the €190bn level for the year to date in a month where issuance levels have averaged around €30bn per month over the past four years, but likely won’t this year. The other deal of note came from Kazakhstan which printed 5-year and 10-year maturity deals for €525m each. In financials, leasing group Grenke Finance ‘delayed’ €300m in what was supposed to have been a short 5-year – the latest victim of investors fretting about financing smaller/unfancied deals/borrowers.

The US sanctions on Iran took effect and made sure that the day’s trading had little chance of any material upside. In fact, we spent the session in and out of the red in equities by a small amount, reflective of the US midterms and the headline risks around the Iranian sanctions. There were no surprises following a Eurogroup ministers meeting. They were requesting that Italy revise its budget spending plans (by November 13). We will be on tenterhooks until then. The FTSE closed a small up, the DAX 0.2% lower and US stocks were mixed (Nasdaq -0.5%, S&P +0.5%), as at the time of writing.

Italian debt was barely moved on the day, the 10-year BTP yielding 3.33% (+3bp). The 10-year Bund was left to yield 0.43% unchanged and the Treasury, 3.20% (-1bp). Gilts were unchanged, the yield on the 10-year 1.50% at the close.

In credit, the synthetic indices were also barely moved leaving iTraxx Main at 69.8bp (-0.7bp) and X-Over at 288bp (-0.2bp), reflecting the general unease in the market. As for cash, it was no different, but slightly better bid.

And with those US midterm elections coming up next, we are in for another quiet session.

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.