5th February 2020

🍾 Party in full swing, again

MARKET CLOSE:
iTraxx Main

43bp, -0.8bp

iTraxx X-Over

213bp, -3.5bp

🇩🇪 10 Yr Bund

-0.37%, +4bp

iBoxx Corp IG

B+103bp, -1bp

iBoxx Corp HY

B+344bp, -9bp

🇺🇸 10 Yr US T-Bond

1.64%, +4bp

🇬🇧 FTSE 100

5704.45, (-0.47%)
🇩🇪 DAX

10356.70, (-0.23%)
🇺🇸 S&P 500

2659.41, (+2.28%)

Throw in the towel…

It used to be ‘don’t fight the Fed’. Now it’s don’t trade against that wall of cash. There is still a bucket load of it looking for a home, and an ever present expectation of even more, cheaper money to come if things go awry (via an appropriate policy response). That dynamic has sustained this current asset price rally (bubble) for a decade.

There’s obviously legs in it still, as the US equity markets again flirted with record highs.

So whatever the various event-risk scenarios, the markets are in no mood to give up and asset prices are being driven higher. Clearly, buying the dip still works despite protestations in some quarters to the contrary. There’s just too much liquidity in the system. It needs a home.

The raft of PMIs during the session point to a remarkable recovery in the UK post-Brexit, although there was more of a mixed bag across the Eurozone. Nevetherless, the service sectors are bouncing back – especially in the UK (and Germany) and they helped to establish a positive tone through the day, coming after a more cautious open.

It’s been a while, but it meant that the midweek session felt like it was back to normal. In credit, that meant deals galore and a borrower printing a seven-tranche, dual-currency deal (there was also a five tranche offering) to get the IG non-financial juggernaught back on the road.

Equities, meanwhile, continued to exhibit some kind of a post-coronavirus recovery push, with scant sign that a breather might be needed. And that’s leaving definite signs of irrational exuberance in the equity recovery.
We suppose that it helped that there were reports of a cure for the coronavirus in the works, although it will be too late to distribute for the current outbreak.

Not that anyone will really take stock, but some nervous signs must be emerging from that Tesla share price. Although it gave 10% back in the session, having risen by around 40% this year, it looks overcooked and has been receiving much attention. Investors clearly do have short memories.

The growth hit that the Chinese and global economy will take on the coronavirus spread – we think 2% Chinese GDP, around 0.2% – 0.3% global GDP – is being ignored. Or maybe, the hope or expectation is that once under control, we can recoup much of the losses through a Q2/Q3 recovery.


IG non-financial issuance dominates again

It was busy on Tuesday for the IG non-financial market, but on Wednesday we had something which was almost unique if our recent memory serves us well. Two multi-tranche, multi-currency deals. And a huge amount of demand for them. It was all very exciting.

The market is in great shape, but that’s because investors seem pretty desperate all being told.

LVMH might be taking a hit in due course on revenues and profits as high spending Chinese customers hold back, but with little by way of a credit impact anticipated, they were in the market to fund the Tiffany acquisition. They issued seven tranches, five of them in euros, the other two in sterling.

The luxury French retail group issued €1.75bn in a 2-year floater at Euribor+13bp, €1.25bn in a 4-year at midswaps+22bp, €1.25bn in a 6-year maturity at midswaps+27bp, €1.75bn in an 8-year at midswaps+33bp and €1.5bn in an 11-year transaction priced at midswaps+38bp.

The borrower also took £700m in a 3-year at G+55bp and £850m in a 7-year maturity at G+75bp. Books were up at a massive €25bn and final pricing across the tranches 13-27bp tighter versus the initial talk.

Having managed to manoeuvre that offering, Comcast was in for refinancing of its own debt load following that Sky acquisition back in 2018. They issued €800m in a long 7-year at midswaps+45bp, €1.4bn in a 12-year at midswaps+65bp and €800m in a 20-year at midswaps+100bp.

Of course, there were a couple of sterling tranches to add to that €3bn haul. That came courtesy of £600m of a 9-year at G+95bp and £800m in a 16-year at G+100bp. The euro-denominated deals were priced 20-25bp inside the opening indications across the tranches, and the sterling ones 15-20bp tighter.

That €7.75bn from LVMH and €3bn from Comcast took the volume year to date to €32.25bn, which we think is still a little behind schedule. Hence the great level of demand.

When we came up for air, we were in the high yield space. We had a bog-standard, single tranche deal from Amplifon which issued an upsized €350m in a 7-year at midswaps+140bp (1.237% yield).

The books up at €3.5bn saw final pricing a massive 40bp inside the initial talk.

Also in high yield, Fedrigoni priced €225m of a 6.5NC1 structure at Euribor+412.5bp (-37.5bp versus initial talk), while Isabel Marant finally priced its €200m 5NC2 senior secured deal to yield a rather juicy 6.625%.

Late on, VodafoneZiggo priced 10NC5 of a €900m issue to yield 3.375%, as well as $400m yielding 5.875% in a 10NC5 structure as well.

Issuance in the high yield market is going at a great pace, with €15.8bn already accounted for in these opening weeks of the year, and the likes of Q-Park and Sarens to price.

That level of issuance usually takes the whole quarter!


Risk markets back on track

The news flow in the session was good. As well as those upbeat European PMIs, the ADP employment report saw 291k jobs added in Janaury which was well ahead of the 156k expectations and augers well for the non-farms report due on Friday.

The day’s corporate earnings stream was more mixed. News that a coronavirus vaccine in the offing was obviously well received. US PMIs for services also beat expectations while the trade deficit shrank for the first time in 6-years (as both components narrowed).

Confidence rippled through the markets. Rates were not so much in demand and we saw another back up in yields. The 10-year benchmarks saw the Gilt yield up at 0.59% (+3bp), the US Treasury at 1.64% (+3bp) and the Bund at -0.37% (also+3bp).

The big story was in equities, though, as the S&P closed in on a record high, the Dow likewise wasn’t too far away (less than 1%) – both just before the close. In Europe, the FTSE added 0.55%, the Dax 1.5% and the €Stoxx50 1.2%.

In synthetic credit, iTraxx Main moved lower to 43bp (-0.8bp) and X-over to 213bp (-3.5bp) which were moderate moves but they hadn’t raced higher previously when equities sold off.

The cash market had another good session, squeezing some as the feel-good factor held firm for risk assets. The IG iBoxx index closed a basis point tighter at B+103bp and this is now flat for the year, again.

The sterling corporate bond index also squeezed a basis point to G+132bp, undeterred by the issuance in the session.

We had 12bp of tightening in the AT1 index (B+363bp) while the high yield market also squeezed, by some 9bp leaving the index at B+344bp. And that despite the issuance.

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.