15th November 2018

No, Prime Minister

MARKET CLOSE:
iTraxx Main

76.1bp, +3.2bp

iTraxx X-Over

314.2bp, +14bp

🇩🇪 10 Yr Bund

0.36%, -4bp

iBoxx Corp IG

B+153.4bp, +4.9bp

iBoxx Corp HY

B+457bp, +14bp

🇺🇸 10 Yr US T-Bond

3.10%, -2bp

🇬🇧 FTSE 100 5897.76, (-1.54%) 🇩🇪 DAX 12313.36, (-0.54%) 🇺🇸 S&P 500 3271.12, (+0.77%)

‘No deal’ it will be…

It doesn’t get more exciting than when one can smell some political bloodletting. The great Sword of Damocles dangles over PM Theresa May, following an eruption of massive proportions around the Brexit “agreement”. For most, it clearly and rightly dominated the day.

It should not have been so – or the timing was just not great – because we also had that massive 6-part offering from Takeda Pharmaceutical Company Ltd to contend with. Alas, the credit fraternity were focused as much as they could be on filling their boots of this mega-deal, coming cheap as the borrower needed to pay-up for size. As we stated in previous comments, size opens eyes.

Sterling-denominated credit took a hit, as we might have expected. Political turmoil is rarely welcomed by the market, but the situation around Brexit is all the more serious. Obviously, financial paper was better offered, but the repercussions were felt through most of sterling credit, albeit the flow and volume was light. Small enquiry (selling) was greeted with a defensive bid and usually no trade. Sterling currency took a big hit to $1.2760 from $1.30 earlier, Gilts were better bid while the FTSE was flat – generally saved by a worse fate as a result of that currency weakness, although some sectors were aggressively sold.

Clearly, as the session progressed, the backlash on the so-called ‘agreement” fed through into euro-denominated markets. This is a great deal for the EU and so a no-deal Brexit is as close as it has ever been. So while the 10-year Gilt yield dropped to 1.36% (-14bp), there was also a bid for other safe-havens with the equivalent maturity Bund yield falling to 0.37% (-3bp). Even Treasuries were better bid, the yield on the 10-year at 3.10% (-2bp).


But that doesn’t bother Takeda

Takeda Pharmaceutical Company Ltd Mega Deal

Takeda Pharmaceutical Company Ltd Mega Deal

The funding of its potential acquisition of Shire Plc saw to it that the Japanese group issued €7.5bn in the euro markets and the cheap deal didn’t fail in managing to elicit the support it needed to get done. Takeda issued €1.25bn in a 2-year at midswaps+55bp (-10bp versus IPT), €1bn in a 2-year floater at Euribor+55bp (-10bp versus IPT) and €1.5bn in a 4-year at midswaps+105bp (-10bp versus IPT).  There was also a €750m 4-year floater priced at Euribor+110bp with an 8-year fixed €1.5bn deal at midswaps+155bp and they closed out with a 12-year maturity €1.5bn offering at midswaps+195bp. These deals were also priced 10bp inside the initial guidance with combined books at around €12.5bn. The combined deal was the second-largest single transaction of the year (Sanofi lifted €8bn on the 14th of March).

The Takeda offering wasn’t the only deal in the session. We had Munch Re issue €1.25bn in a Tier 2 30.5NC10.5 structure at midswaps+240bp.

The Takeda deal takes the IG non-financial issuance for the month to a highly respectable €20.9bn and we still have the potential multi-tranche Stryker deal to come next week. The total supply in the market, year to date, is now up at slightly better-looking €210bn (€265bn last year). Another €10bn of activity this year, or €220bn as a total for the full-year looks like a reasonable target now.


PM May in peril

The numbers don’t lie. The deal will not get through parliament. There will surely be severe repercussions for the UK PM. Rightly so, the UK took centre stage for the broader markets. Gilts caught a massive bid as highlighted above and other safe-havens followed suit. The risks seemed to be with the UK, but they will have a massive contagion impact elsewhere if a no-deal Brexit is eventually called. The very measured response in other markets (euro credit for example) might be a little more fraught then.

Anyway, the FTSE closed flat and the Dax was off by 0.5%. US equities are becoming more difficult to read with so much intraday volatility. It was no difference on Thursday as they resided in the red for a while before moving 0.9% higher later, as at the time of writing. There were no further developments in Italy, but Italian stocks underperformed, lower by o.9% at the close. The yield on the 10-year BTP rose to 3.50% (+2bp) just as other government bond markets were mostly all better bid. Maybe the market reaction to the Brexit situation is a harbinger of things to come for Italian debt and equity markets.

Credit protection costs rose, although the underperformers – as we might expect – were UK names. Still, it lifted iTraxx Main to 76.1bp (+3.2bp) at the close while we had X-Over close 14bp higher at 314.2bp.

We’re going to need upbeat broad macro to help the indices lower because the Brexit situation isn’t going to help improve the mood anytime soon. And upbeat macro seems unlikely too, meaning that credit protection will remain better bid (higher) for choice.

In the cash market, IG secondary was better offered and the defensive bid saw the index almost 5bp wider at B+153.4bp. It’s the widest level since June 2016 and 57bp wider this year. Sterling credit was under pressure with bank capital and the like particularly weak. The iBoxx IG sterling index moved 6bp higher to G+178bp although total returns rose because Gilts rallied so hard. Scant consolation?

The high yield market was also weaker and we had 14bp of widening in the index when the marks went in, left at B+457bp.

What a week!

Have a good day.


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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.