27th November 2018

She’s on the road… to nowhere

MARKET CLOSE:
iTraxx Main

79.7bp, +1.9bp

iTraxx X-Over

339.4bp, +10.5bp

🇩🇪 10 Yr Bund

0.35%, -1bp

iBoxx Corp IG

B+161.2bp, +3bp

iBoxx Corp HY

B+487.8bp, +7.5bp

🇺🇸 10 Yr US T-Bond

3.05%, -2bp

🇬🇧 FTSE 100 6220.14, (+0.87%) 🇩🇪 DAX 12021.28, (+3.75%) 🇺🇸 S&P 500 3080.82, (+0.49%)

It’s all in vain…

One step forward, two back, and few are convinced that we are anything likely going to sustain a rally between now and year-end. They’re right to feel/trade that way.

The Brexit debate continues but was less dominant in the session, although issues around it will resurface towards the end of next week in a big way – ahead of that crucial Commons vote on December 11. The other bit of good news was the emerging view that the Italians were rowing back on their effusive budget plans for 2019 and hence that ‘intolerable’ deficit as seen by the EC. Trump later stirred, though, on China tariffs and that dominated the mood as a little pressure was applied to US equities.

In the end, there wasn’t a whole load of enthusiasm around, and the markets were not flying. Nevertheless, amid that feeling of reduced immediate event-risk, primary credit was in better shape, giving borrowers an opportunity to get something on the screens as deals finally flowed.

The deal flow looks either opportunistic or from borrowers long flagged to have been looking to get deals away. And this is how it will play out for the remainder of the year, with business set to conclude by the end of the second week of December at the very latest.

There will be little appetite to get involved before then, anyway, and it further ties in with the parliament vote which might unleash some material negative market reaction. Our view at this moment is still a rejection of the UK/EU deal, but the margin of any political defeat will be what dictates the severity of market reaction.

Anyway, Stryker Corp finally came with its multi-tranche deal while Solvay was in the market for what has now become a rare hybrid offering. Westpac, HSBC and Commerzbank joined in with shorter/intermediate dated senior financial deals, while Russia took euro funding.

When compared with the recent dearth of deals, that flow represented a decent smattering of deals for the corporate market although the volume of non-financial deals was still quite low. Secondary was quiet and easily better offered in a weak session for cash.


Primary offers delayed deals

So Stryker Corp’s 4-tranche deal dominated. This deal had been in the pipeline for a week or so but was a victim of the volatility over that period. The borrower lifted €300m at Euribor+28bp in a 2-year floater format and then €550m in a 5-year fixed effort at midswaps+85bp. In addition, they took €700m in a 9-year maturity at midswaps+135bp and 12-year funding for €600m in a tranche priced at midswaps+165bp. The final pricing was some 20bp tighter versus the initial guidance for the fixed tranches of this high triple-B/low single-A rated US company.

The other non-financial deal of note was the €300m transaction from Solvay which took PNC5.25 in hybrid notes at a yield of 4.25% (-25bp versus IPT). The deal was over 2x subscribed. The issue was rated high double-B but will have been sold predominately into IG funds. It was also the first high yield rated offering in over two weeks.

In senior financials, Westpac issued €1bn in a 2-year floater at Euribor+32bp, while Commerzbank took €750m also in a 2-year floating format at Euribor+40bp followed by a 3-year fixed deal at midswaps+50bp for €650m. HSBC HoldCo issued €1bn in a 3NC2 structure and another €1.25bn in a 6NC5 deal.

The Russian Federation managed to get €1bn away, at the opening level costing them 3% in a 7-year maturity.


Long run-in to year-end starts

Elsewhere in the markets, there seemed a sense of unease. It didn’t help that Trump chose to comment again on the US/China trade spat,  threatening more tariffs as he turned the screw some more on China. US house price growth is now at its slowest rate in a couple of years, affected no doubt by the rise in rates.

So for much of the session in European hours, US stocks were in the red or flat and there was little impetus for European markets to add to Monday’s sharp gains. They didn’t! With that, there was no way that credit in secondary was going to be anything other than slightly better offered. Rates were better bid too.

We closed with European stocks up to 0.4% lower (autos feeling it most after those Trump remarks) and US stocks were dipping in and out of the red/black. Rates seemed to have a better bid behind them for most of the session but did fade that a little into the close.

Bunds in the 10-year were left to yield 0.35% (-1bp), Treasuries were yielding 0.35% (-2bp, 10-year) while the equivalent maturity Gilt was yielding 1.39% at the close (-2bp). BTPs gave a little of Monday’s gains back to yield 3.30% (+6bp).

In credit cash, we had weakness and plenty of it leaving the iBoxx index at B+161.2bp (+3bp) with the AT1 index 17bp wider at B+641.6bp. As we suggested in Monday’s comment, there is likely to be better sellers into any improvement in the tone/bid because that moderate weakness in equities should not have elicited this much weakness.

In high yield, the same story. The index moved 7.5bp higher to 487.8bp rounding off a weak day for cash credit. the indices moved higher too with Main 1.5bp higher at 79.9bp (+1.5bp) with X-Over 10.5bp higher at 339.4bp.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.