14th September 2016

Sisyphus would be less challenged

MARKET CLOSE:
FTSE 100
6,666, -35
DAX
10,386, +-45
S&P 500
2,127, -32
iTraxx Main
71.5bp, +1.5bp
iTraxx X-Over Index
333bp, +7bp
10 Yr Bund
0.07%, +3bp
iBoxx Corp IG
B+120bp, unchanged 
iBoxx Corp HY Index
B+417bp, -0.5bp
10 Yr US T-Bond
1.72%, +5bp

Trudging up by the stairs again…

It’s not the end of the world, after all. Chill. The best we can say is that the markets are prone to short periods of intense speculative – or otherwise – sell-offs, but they do seem far and few between since that prolonged Jan-Feb slump. Now, after last Friday’s hiccup, we have seen some early recovery and calm just about everywhere. Few investors have panicked. The truce didn’t hold and the weakness set in again in the afternoon session.

national-grid

Big deal: National Grid

For credit, it was clear risk-on again as the primary market delivered a gush of new issues led by a 4-tranche £3bn blockbuster from the UK’s National Grid, no doubt feeding into the better investor sentiment following the previous evening’s “devil in the detail” announcement of the BoE’s corporate bond QE plan.

For the markets, it’s like we have reset the bar and the challenge is in trying to get prices up again. That might be more easily seen and achieved in equities, given the products liquidity – and propensity for large moves in either direction – and they might get a shot in the arm later this month depending on the Fed’s decision. For Eurozone government bonds, the headlines have been around Bund yields in 10-year maturities in positive territory after what some have called a rout.

A positive yield strangely spooked the market! We would think that given the difficulties in getting any semblance of decent growth and inflation back into the system, they have to be heading most likely lower (negative) again, with an additional push coming when (as we believe) the ECB announces further QE measures later in Q4/early Q1 2017.

Primary brings up the €200bn in IG non-financials

Kerr-ching! The sterling market has seen nothing like it since the record-breaking year for issuance in 2009, when almost £45bn was printed (versus an average of less than £20bn in any given year since then). National Grid got an increased £3bn in a 4-tranche (was supposed to be 5) deal spanning the 5-30 year maturity spectrum, in one of the largest offerings in this currency…. since time began. Euphoric, and that will give a welcome shot in the arm to the sterling corporate bond market because without any new issue activity, it really doesn’t offer any excitement at all.

Novartis

2-tranche €1.75bn in IG Corporates for the pharmaceutical giant

Away from those sterling deals, there were a flurry of borrowers in euros. Novomatic (€500m), Eni (2-tranche for €1.5bn), V.F. Corp (€850m), Eaton Corp (€550m) and Novartis (2-tranche for €1.75bn) were the IG corporates, all managing to price 5-25bp inside the initial price talk. The deals were generally all well-received and books ranged from 1.5-6x oversubscribed. The total of €5.15bn added to the €10.5bn issued to end of last week taking the month-to-date total to a very respectable €15.7bn for IG non-financial issuance. For the year-to-date, we are now at €200bn! The 2009 record issuance totalling €285bn (Dealogic data) has to be in sight and we effectively have three months of business to get through to try to achieve it.

In HY, Hertz (€225m) and Axalta (€450m) were in the market – important for some, but most were focused on the IG deals.

Fed jitters resurface

After a bright start, renewed US interest rate fears gripped, leaving the story for now as being weakness in government bond markets and jumpy equities. The 10-year Bund – using this as the benchmark – saw its yield at +0.01% before rising to close at 0.07% (+3bp in the session).

Gilts are coming under pressure as well, while the BoE auction for long-dated Gilts was 3x subscribed! 10-year Gilts saw yields rise to 0.91% (4.5bp) on the follow, while just about the government bond market was feeling the pressure. Equities also closed weaker (around 0.5% in the red) after a promising start not helped by weakness in the US where the S&P was off over almost 1.5% again.

For the corporate bond markets in secondary, we closed with spreads unchanged, given that the focus was squarely on the primary markets. In sterling, the markets moved a little better with spreads a touch tighter while yields on the sterling index were unchanged. The HY market was pretty much unchanged in a fairly uneventful session.

That’s all for now. Have a good day. Back with you 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.