- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Not concerned with fundamentals…
Equities shooting higher and oil in the $50 per barrel zone will have stolen the big headlines. That’s great news, as rising markets usually lift confidence, encourage more risk taking and can boost activity. That’s not the case right now though as we don’t see enough fundamental economic improvements anywhere to justify sharply rising markets. Mind, the sharp moves higher can’t be put down to month-end portfolio considerations either. On those fundamentals, we must cast an eye as to what’s happening on the ground. For instance, Italian industrial activity is still slowing and failing to break out of its malaise, while Spanish producer prices continued to deflate – hard, while Greece got the money to live and fight another year.
However, Northern Europe was having none of it as the Ifo German sentiment indicator pointed to increased confidence from the business sector in this particular survey. Outside the Eurozone, retailer M&S of the UK had a shocker and its share price reacted accordingly.
That’s a mixed bag of information/newsflow – some good, some bad and some ugly. The problem, as ever, remains – that of a north/south eurozone economic divide which fails to converge, but amid hopes still that Northern Europe (and in particular, Germany) can somehow nurse the rest of the Eurozone back to health. The patient has been in a coma for eight years, so good luck.
There was plenty of new supply, but not necessarily as far as IG non-financial issuance was concerned. With little competition out there, now would have been an ideal time to get a deal on the screens and be the almost exclusive focus of the corporate bond investor. JC Decaux and Chinese group Bright Food were the two on show. JC Decaux lifted €750m in 7-year funding at midswaps+80bp, which was 15bp inside the initial guidance on a 3.5x subscribed book. That’s good business for them. Bright Food issued €400m in a 3-year deal at midswaps+185bp (cheap for the rating, but Chinese risk premium in there), but also 15bp inside IPT.
The lower level of issuance this week has allowed for some better performance of most recent deals, which ought to help sustain the better tone for corporate bonds. The total issuance tally notched up to €41bn for the month for IG non-financials, just €400m shy of becoming the second best month ever for supply in the euro-denominated corporate bond market.
Away from that, it was the high yield market’s turn to get some attention with a couple of deals. HeidelbergCement was able to go much longer (good business, great name) with an 8-year deal for €750m and Hoist Kredit came with a €250m, 3.5-year offering. HeidelbergCement will likely achieve IG ratings within a year or so and will appeal to that much bigger investor base, thereby being able to price accordingly – and they managed to lop 20bp off the initial price talk for this deal.
The financials space had a busier than normal session with senior deals from Credit Agricole and Danske Bank, a T2 issue from Credit Mutuel Arkema with Erste Group issuing a 8.875% coupon CoCo.
Equities on the rise and lifting most boats
From the lows seen last week, the DAX is up over 400 points, or some 4.5%; it is still down 5% year-to-date. A week is also a long time in equity markets. Government bond yields have played out in a narrow corridor while credit spreads have barely budged. We have been stuck at B+148bp for the Markit iBoxx IG index for the best part of a couple of weeks. The focus for us has been on primary and there has been no catalyst therefore to see us want to delve into secondary and push spread markets tighter. It’s been like that for a while, admittedly.
Nevertheless, the corporate bond market is in a good space, is shaped to move tighter in spreads but needs a little push to help it get it out of its moribund low volume, low flow state. While we wait for the ECB, it’s all become rather dull if there is nothing happening in primary. Yesterday was a good case in point. That is, we could do with some volatility as it might get some trading going, but event risk and headline risk specific to corporate bond markets is also eluding us.
Even though oil inventories declined sharply in the US, the boost to the price of the black stuff didn’t really move higher. We’ve come a long way off those $26 per barrel lows and to get bullish here we could do with macro economics/higher demand being the reason for a push. WTI and Brent were still trading below $50 per barrel – but by only a few cents, with Brent at $49.90 at the time of writing. Govies were better bid through the session and yields pushed lower. The 10-year Bund was back down at 0.15%, the equivalent Gilt edged down too at 1.45% but that Greek deal saw the periphery outperform. Italian 10-year yields dropped 7bp to 1.35% while Spanish yields fell to 1.46% (-6.5bp).
Corporate bonds closed out slightly better too, with spreads, as measured by the Markit iBoxx index, 0.5bp lower at B+148bp in IG with CoCos particularly in good form. For HY, we drifted through a decent session better bid leaving the iBoxx index down at B+493bp. The illiquid nature of the market continues to limit any obvious major moves tighter when stocks ratchet higher, but we did see them reflected in the liquid corporate market synthetic iTraxx proxies. The cost of protection fell with Main 3bp lower at 72bp and X-Over some 12bp cheaper at 307bp.
Have a good day.