27th April 2016

Negative yielding corporates – not for me

FTSE 100
6,289, +28
10,260, -35
S&P 500
2,092, +4
iTraxx Main
71bp, unch
iTraxx X-Over Index
305bp, unch
10 Yr Bund
0.30%, +4bp
iBoxx Corp IG
B+139bp, unch 
iBoxx Corp HY Index
B+476.5bp, -1bp
10 Yr US T-Bond
1.93%, +2bp

Records to be broken…

There are plenty – even in their right mind – who buy a new issue corporate bond offering a negative yield. They will effectively pay for the privilege of not holding cash. The hope in this case has to be that bond prices continue to rise and capital gains trump the negative interest rate return. It’s worked fairly consistently at the front end of the government bond market for the last year or so, though it’s a little more volatile at the back end. But corporate bonds? Well, in the end it’s about how one is paid. That is, do what it says in the pitch book and invest in corporate bonds to justify those fees.


McDonald’s helped make the new April record

In a sense, there is little alternative but to chase corporate bonds and spreads tighter and yields lower, quite likely into negative territory. We will just make it the next asset class that is dumbed down to zero – or less, as the case might be. A zero or negative-yielding asset leaves the likes of gold looking quite alluring, but that’s an asset class a corporate bond market manager can’t buy.

Elsewhere, and more interestingly in primary, they were back to their old tricks as Mickey D’s and ENAGAS took total supply levels for April into record territory for this month. McDonald’s 3-tranche deal saw 4-year, 7-year and 12-year issues priced at midswaps+50bp, +70bp and +100bp respectively. These were all 20bp tighter than the initial guidance and eventually offered less flattering (but still decent) new issue premiums of 5-10bp for the shorter tranches and 15-20bp for the long one. Books exceeded €14bn for €2.5bn of combined prints.

As for ENAGAS, the group went out with IPTs of midswaps+80bp for 12-year benchmark funding, which equated to a new issue premium of 15-20bp. At the midswaps+62bp print, they wiped away the new issue premium, coming flat to the curve for €750m off books at just under €4bn.

The combined deals at €3.25bn take the monthly issuance run rate to €28.6bn, which is now a record for any April, beating the previous record level set last year (€26.7bn) – see chart below. Other deals included another real estate deal, this time from Aroundtown Property, while Liberty Mutual issued in senior paper for the insurance sector. We could still get deals today, but we might also anticipate a quieter session going into that Fed meeting.

April IG non-financial corp issuance

And not much else

There was some excitement – from the headlines anyway – in the rates market as Belgium sold its first Century bond and the UK attracted demand of £21bn for a £4.75bn issue of 50-year Gilts. But that was about it. After a couple of down days, equities tried to rally, but any early perkiness faded as we seemed to settle into a pre-FOMC mood.

Cuts: Freeport-McMoRan

Freeport to axe 25% of oil & gas workforce

On the newsflow front, Freeport McMoRan was culling its workforce while profits at BP surprised to the upside. Fiat Chrysler’s earnings were on a roll in the US, house price inflation cooled a little and consumer confidence also dipped in April. Denmark lowered its GDP forecasts for 2016 to 1.1% from a forecast of 1.9% just four months ago, and sterling was enjoying a better game of it versus the dollar as it continued its fightback. There was plenty more – good and bad – but we just picked a few to highlight how mixed the newsflow was during the day.

The DAX closed a small down with most other markets also lower. Oil prices moved up a three percent, with Brent left at $45.7 per barrel. Government bond yields moved higher again too, with Bunds underperforming in particular. The 10-year Bund yield was up at 30bp (+4bp, and this yield isn’t going negative just yet) and the equivalent Gilt at 1.66% (+5bp). The Gilt yield was over 30bp lower a couple of weeks ago.

In credit, spreads moved a touch better for choice but we did have some weakness in the higher beta end of the IG market (CoCos and corporate hybrids). The Markit iBoxx IG index ended flat while the HY index was a basis point lower. Flows, volumes and the like were light. For the synthetics, Main and X-Over closed the session unchanged at 71bp and 305bp, respectively.

The Fed communique is up next. Have a good day.

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.