23rd January 2019

We can’t have run out of steam already!

MARKET CLOSE:
iTraxx Main

77.7bp, unchanged

iTraxx X-Over

331.2bp, +2.3bp

🇩🇪 10 Yr Bund

0.23%, -1bp

iBoxx Corp IG

B+328.9bp, -+xbp

iBoxx Corp HY

B+500bp, +2bp

🇺🇸 10 Yr US T-Bond

2.75%, +2bp

🇬🇧 FTSE 100 6001.89, (+1.71%) 🇩🇪 DAX 12764.80, (+2.36%) 🇺🇸 S&P 500 3397.16, (+0.67%)

Dull as dishwater…

Where have all the deals gone? The window is wide open and we’re screaming for corporate borrowers to get their skates on. Surely they are not still nervous about funding conditions. Maybe it’s just that they are punch drunk on the liquidity that they managed to hoard over the previous multi-year halcyon period for low-cost borrowing – and haven’t spent it. They extended maturities, there is no wall of funding approaching over the next year or two and the economic environment isn’t exactly bright and predictable. That must be it.

Plain vanilla corporate primary activity has come to a premature end for the week, with absurdly just the one deal in the IG non-financial sector – namely that of Auchan. That €1bn transaction might just be about it, unless we see an usually busy (or otherwise) Friday session.

It ought not to be so. As already suggested the window is fully open, the receptivity to deal is excellent and it is a great opportunity for corporates to get deals on the board. The one saving grace for corporate bond investors so early in the year is that there is the usual mountain of cash which needs a home early on. Poorer levels of primary suggest that secondary valuations will be contained even as equities veer towards a slightly negative trajectory.

At least EDP took the opportunity to come unopposed and take hybrid funding. The issue might have been rated sub-investment grade but a clear majority of the interest in the issue would have been from IG investors. It was a good deal. As with Engie last week, the Portuguese utility went for a green issue in a 60.25NC5.25 hybrid structure and opened the bidding at a yield of 4.875%. Then, in the orders came! The book closed with orders exceeding €3bn and final pricing was 37.5bp lower than that initial guidance, the €1bn issue printing to yield 4.50%.

So we now have two HY rated issues this month in primary – both from the periphery and both blue chip, well-known names (TIM being the other). A bog-standard corporate borrower eludes us and it appears that we need much more market stability and a longer period of positive sentiment to prevail before anyone would feel confident to test the water. We might be waiting a while yet!

The primary market was littered with covered bond issuance in what was otherwise a very quiet session and fairly limited activity-wise as we await the ECB press conference on Thursday. That was the excuse, although old chestnuts came back in the form of worries on global growth and nothing happening on the US/China trade talks.


Waiting for the ECB, what else?

There was little macro news flow in the session while it was also quiet on the geopolitical front. Equities started off in the red but managed to pull back into positive territory although with any real conviction – and we closed flattish/down in the day. The FTSE was the underperforming market (-0.8%), but sterling strength was the reason for that (up through $1.30) on the back of the opposition Labour Party potentially backing a second Brexit referendum. Anything which stops Brexit will be seen as a positive for the market.

Otherwise, there was a bit of a midweek lull with moves in small ranges. There is a lack of traction in the US/China trade talks and it seemed to unnerve US markets, despite some decent earnings (IBM and United Tech). The S&P was up almost 1% at one stage before it declined and was down 0.3%, as at the time of writing.

In the rates market, 10-year UK Gilt yields closed unchanged at 1.33%, the Bund was better offered then managed a bid and closed to yield 0.23% (-1bp) while US Treasury yields in the 10-year moved 2bp higher to 2.75%.

The credit indices closed unchanged for iTraxx Main and it closed at 77.7bp while there was some moderate weakness in X-Over, which ended better bid at 331.2bp (+2.3bp).

Secondary cash was barely moved in light activity, with investors focused on that EDP deal. So the Markit iBoxx index was left at B+169.2bp (-0.4bp) which was against the grain but given the lack of deals and welter of cash needing to get invested, this low beta part of the market is well-supported. The CoCo market closed unchanged.

The high yield market edged a touch wider, the index left at B+500bp (+2bp0 but amid little interest. With the Brexit debate still raging, sterling credit isn’t doing too badly. The index is 7bp tighter and total returns are showing a +0.7% gain in these early 2019 weeks.

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.