22nd September 2019

One step at a time

MARKET CLOSE:
iTraxx Main/S32

54.2bp

iTraxx X-Over/S32

215.6bp

🇩🇪 10 Yr Bund

-0.52%, -1bp

iBoxx Corp IG

B+122.5bp, unchanged

iBoxx Corp HY

B+394bp, unchanged

🇺🇸 10 Yr US T-Bond

1.72%, -3bp

🇬🇧 FTSE 100 6179.75, (+0.06%) 🇩🇪 DAX 12697.36, (-0.80%) 🇺🇸 S&P 500 3197.52, (+0.60%)

Q3 finishing line beckons…

We’re into the final week of the month and we should more than hang on to current performance. With stimulus in abundance and/or dovish policy broadly confirmed to be in place, there should be little reason to be fearful for Q3’s performance over the next few sessions. Fixed income’s year to date returns numbers are therefore going to look excellent, even if we have given a little back of late.

The credit primary market is throwing out deals aplenty and investors are lapping them up. Negative yields at re-offer are no deterrent. Prices are going higher – that’s good enough.

The recent sell-off in rates has pushed IG returns back to 6.5% year to date having put on only 1% in Q3 so far (that’s no hardship for this asset class) and Eurozone sovereign returns to back below 10%, to 9.2% (+3% in Q3 to date). Also no hardship. IG spreads, though, have lost a little of their lustre following a good rally initially, coming immediately after the ECB QE announcement – but we have had close-on the heaviest month of issuance since our records show going back to 2014. That explains much.

Of course, we were never going to ratchet tighter from current spread levels, but we think that the omens are good for a tightening into year-end. We do, however, concede that the B+122.5bp current IG iBoxx cash level, which is a not-to-be-scoffed-at 50bp tighter year to date, is unlikely to see a record low of B+83bp this side of 2020. The B+100bp level is a more reasonable target to aim for but might need a slowdown in the record pace of new deal issuance currently in the market. We will get a better flavour for it throughout the course of October.

Of course, if the tea leaves are lined up and we do grind tighter over the final quarter, then we ought to see the compression trade between High Yield and Investment Grade markets gather some steam again, too. Valuations in IG are going to look even richer – and more unattractive while getting hold of paper in the face of an ECB QE purchase programme onslaught is going to serve to frustrate most.

The primary market had only its second session of a glorious September so far, which has seen €43.7bn of IG non-financial issuance – whereby it drew a blank. In that near €44bn of issuance, we have had 59 individual tranches, 5-triple tranche deals and Danaher’s 5-tranche visit the largest transaction accounting for €6.25bn.

September IG issuance heading for €50bn

There’s still a week to go and we have a multi-tranche deal expected from Thermo Fisher, which, combined with other deals, is going to get us over the €50bn line for September, and likely closer to €55bn come month-end.

The sole borrower in the session was BCP which issued subordinated debt, in a 10.5NC5.5 Tier 2 structure priced to yield 3.875% for €450m.

The high yield market saw a decent week, too, with €1.6bn of issuance (OTE and Telefonica and TLG Immobilien hybrids), with the monthly total so far up at €7.6bn and the year to date total issued using to €45bn. April’s €9.8bn issuance was the best for any month this year. There’s a decent pipeline building and we might be looking at the €60bn area volume wise, for the full year.


Boris Johnson, Humpty Dumpty, great falls

It’s getting a little more desperate in the Middle East, with Trump announcing new economic sanctions on Iran which will heap more pressure on the regime there, and for which the response is going to be difficult to judge. It’s the clear and present danger and top of the list of immediate geopolitical concerns.

That notwithstanding, and as suggested earlier, the dovish central bank stances by most will see us through the final few months of the year and hopefully in decent shape.

Brexit challenges remain but the rhetoric of late has been more conciliatory, which we think is going to allow the various political players reach a compromise deal without them losing (too much) face. A deal is more likely than not, we would conclude – at this stage, anyway.  More immediately, the UK’s Supreme Court is expected to rule on the lawfulness or otherwise of prorogation of parliament, and that judgement will come very early this week.

So we closed out last week with US equities taking a tumble into the final hours of the session. Of course, trade worries were the cited reason, as officials from China cancelled a visit to American farms. It looks as if this issue is going to rumble on… and on. The S&P closed 0.5% lower. Before that, European equities were flat in the session.

US Treasury yields moved 3bp lower in the 10-year as they were bid up late into the session, left at 1.72%. Bund yields in the same maturity edged to -0.52% (-2bp).

Just as other markets were fairly quiet, credit followed suit with investors more focused on the half-year iTraxx index roll. That left the iBoxx IG cash index at B+122.5bp (unchanged) while a slightly better bid for choice in the CoCo market saw the AT1 index at B+484bp (-8bp). the high yield market closed unchanged – just as it had been all week (!), the index left at B+394bp.

As for this week, Brexit is front & centre with the court decision due imminently. We have several Fed speakers on the circuit along with a host of US data which combined might feed into some market volatility.

Have a good day.

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.