26th April 2016

Pile ’em high, but sell ’em rich

MARKET CLOSE:
FTSE 100
6,261, -50
DAX
10,294, -79
S&P 500
2,088, -4
iTraxx Main
71.5bp, +3.5bp
iTraxx X-Over Index
305bp, +10bp
10 Yr Bund
0.26%, +3bp
iBoxx Corp IG
B+139bp, -1bp 
iBoxx Corp HY Index
B+477bp, -1bp
10 Yr US T-Bond
1.89%, +1bp

Market closed in short maturities – for quality borrowers …

Finally some sense in the corporate bond market. We’re learning quick-ish. No unreasonable new issue premiums and finally the banks telling it like it is. So Unilever comes with a 3-tranche offering, with new issue premiums off initial price talk of just 15bp, 5-10bp and 5bp for 4-year, 8-year and 12-year maturities respectively. Higher at the front end versus the existing curve, because anything (much) less and they would potentially be offering a bond with a negative yield. No one wants that, literally.unileverAfter claiming books of €4bn+, they printed an increased €1.5bn and managed to tighten the pricing by 5bp at the front end and 10bp for the 12-year. The new issue premiums finally ended at +10bp for the 4-year (to yield 0.06% and a 0% coupon), no concession for the 8-year and we calculate 5bp through the curve for the 12-year.

The key takeaways are that Unilever’s much tighter curve and quality credit dynamics gave the bankers less room to play games through initially offering very high concessions to entice investors. But more importantly, with little sense in anyone buying a negative-yielding bond, it would appear that better quality borrowers are locked out of issuing in maturities of less than 4 years, where the swap yield is currently at -6bp and where the 3-year is at -13bp. More distortion of the market, courtesy of the manipulative hand of the ECB.

Before we think we have a change in the pricing game, they were up to their old tricks with ABB’s 7-year deal going out with indications of midswaps+50-55bp, and the upsized €750m deal eventually priced at midswaps+35bp, so 15bp tighter versus IPT for a less frequent but decent quality borrower (on books of around €2bn). The €2.25bn printed in the session takes us to €25.3bn MTD and leaves us just €1bn or so short of the total needed to make this the best April for supply, ever. That ought to come today or tomorrow at the latest.

Credit outperforms, but that’s to be expected

We are no longer beholden to broader macro concerns, it seems.

Stocks were down

Stocks were down again

On another day when stocks were down, oil was flattish/down and the tone was generally one of weakness, the corporate bond market managed a decent session. Focus was obviously on the ABB and Unilever deals, but we are now technically placed to continue to grind out performance on a daily basis as long as we get no major down session. That is, credit would find it hard to tighten if stocks fell by, say, more than 2% in any day, as this would signify some event risk somewhere, or an altercation such that we step back and wait for it to pass. Generally though, the risk proxies for us remain the iTraxx indices, and they usually move in lockstep with stocks and broader market sentiment for risk. For the second session in a row, that is exactly how it played out.

It turned out to be a somewhat nervous session ahead of the Fed meeting on Wednesday and the Bank of Japan likely with some sort of action of its own just after. That left rate markets fairly sensitive and weaker (yields on the up), while equities played to the tune of the oil price, we think. So like a perfect storm for all – and weakness. The Bund yield backed up to 0.28% at one stage, a level not seen for several weeks. And to think, only a week or so ago we were writing in terms of the 10-year yield being within touching distance of its all-time record low of 0.05%. The DAX equity index was 0.8% lower and all bourses closed out in the red. Oil prices were down too, but there was no major fall, with prices off by less than 1% and Brent still cozying up to $45 per barrel.

In credit, spreads moved a little better amidst limited interest and low flow and volumes. The Markit iBoxx IG corporate index ended a basis point better and touched a new 2016 low at B+139bp. CoCo’s were flat to a touch better offered, but non-financial corporate hybrids were better bid and prices moved 0.25 points higher. The high yield market was similarly slightly better and it left the index a basis point lower. And finally, our risk proxies duly delivered with the iTraxx Main index at 71.5bp (+3.5bp) and the X-Over index 10bp higher at 305bp.

That’s all for now. Negative yields on corporate bonds at new issue? Hmmm.  Back in the morning.

Suki Mann

A 25-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 Credit Market Daily.