- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
It’s all so clichéd
Tuesday was just a false alarm. We scratched our heads wondering why corporate bond issuance was close to nil during that session given that we are embarking on a period where the ‘event-risk’ coast is clear. One where we could think that borrowers might have wanted to get some funding in before we go into the uncertainty which might come from the French election season.
Wednesday delivered. It was a risk-off session when defined by weaker equities as they played catch-up with previous overnight losses from the US. That meant government bond markets sustained a good bid while the corporate bond markets were busy in their primary world.
There wasn’t much in terms of newsflow to sidetrack corporate bond markets – or any markets for that matter. The decline in equities after such a good run was perhaps to be expected. They were probably blowing off some steam – amid growing clamour that US stocks are as overvalued as they ever have been.
We still have the US 10-year Treasury yields playing out in a 2.30 – 2.60% range and the Bund in a 30 – 50bp range. Corporate credit hasn’t been as well blessed for some time as it seems to be at the moment, with spreads grinding tighter each session and primary being taken down aplomb.
Someone has forgotten that we’re in the throes of an economic recovery as the Eurozone economy drags itself off the floor. Also, Trump’s economic policies (if he is around long enough) are meant to unleash a monster of a fiscal spend such that growth in the US is thought be going to double by 2018. Add into that, few would contest that the markets have nonchantly demonstrated over the past 9-months that perceived negative events are being brushed aside.
Equities therefore should well be higher, as should government bond yields, while the corporate bond market sees improvement in fundamentals trumped by negative technicals as the (credit to equity) rotation trade kicks-in. None of that is happening. And so the trend is your friend.
Primary credit flourishes
There were mandates galore in the session – and a few deals too to go with them. The markets were excited with VW‘s announcement of a deal – which will be today’s business – the group’s first such plain vanilla offering since the third quarter of 2015 – and that emission scandal in the US. The four-parter will be well in excess of €2bn and will dominate today’s session. There’s much around other auto players’ diesel emissions, but at least VW’s ills/costs are now quantifiable. We have little doubt that the transaction will meet with an excellent reception.
The actual prints yesterday took in the triple-B rated Ferrovial Emisiones for €500m in 8-year funding, in the process reducing the initial price talk for the deal by the now obligatory 15bp. Edenred also printed €500m in a 10-year deal and at midswaps+117bp, reducing the opening guidance by 18bp on books 3x oversubscribed.
So the IG non-financial corporate market stumped up €1bn of issuance, taking the total for the week so far to €2.3bn – but with that VW offering (and others no doubt) to come.
The unrated – but we think likely double-B implied – Finnair lifted €200m in a 5-year maturity at midswaps+200bp (and 25bp inside IPT) on books 2x subscribed, to principally satisfy those Nordic funds. Aramark was the other HY borrower in the market, taking €325m in an 8NC3 deal yielding 3.125%.
In financials, Spanish insurance group Mapfre caught the eye with a €600m, 30NC10 Tier 2 transaction to yield 4.375%. Yield matters, and there was plenty of it in this deal with books over 6x subscribed and some good tightening on the break. BFCM was also active with a €500m 10-year Tier 2 offering. The other deal came from Azimut Holding for €350m in a 5-year at 2% – lopping 25bp off the opening yield guidance.
Fixed income has a good day
They were on the way up, but yesterday they fell. Taking yields in 10-year maturities, the Bund was offering 0.41% (-5bp), OATs 1.05% (-6bp) and Gilts 1.18% (-8bp). What a difference a day makes.
Three months into 2017 and there is no clear direction amid continued worries around the political scene and some caution about the durability of any economic recovery. WTI fell through $48 per barrel and Brent was trading off a $50 per barrel handle, prices not helped with US crude inventories rising more than expected last week. Equities in Europe were stuck in a 0.3-0.8% range lower in the session.
The secondary corporate bond market had a light session, but it didn’t disgrace itself with any large daily moves – it rarely does these days. So we plodded on amid little flow with investors focused on the primary arena. That left spreads, measured by the broad Markit iBoxx IG cash index, a touch wider at B+130.4bp (+0.5bp) while we had sterling markets exhibiting a little more weakness (+1bp, G+150.5bp for the index).
The high yield market took little bit more of a kicking, and eventually the iBoxx index recorded the broad market up at B+369bp (+7bp).
As for corporate bond market synthetics, they were obviously weaker given that equities were languishing. S27 iTraxx Main closed at 77bp (+0.5bp) and X-Over at 299.3bp (+4bp). With US stocks closing up overnight, we could reasonably expect a better start today.
Have a good day.
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