7th June 2016

Predictable

MARKET CLOSE:
FTSE 100
6,273, +64
DAX
10,121, +18
S&P 500
2,109, +10
iTraxx Main
73bp, -3bp
iTraxx X-Over Index
320bp, -8bp
10 Yr Bund
0.09%, +2bp
iBoxx Corp IG
B+145bp, -0.6bp 
iBoxx Corp HY Index
B+483bp, -3bp
10 Yr US T-Bond
1.72%, +2bp

It’s raining deals…

Air Liquide

Five tranches from Air Liquide alone

The primary market saved what would otherwise have been an uneventful session. And the deals poured in – or rather the tranches did. We had five tranches from Air Liquide for €3bn across 2-12 year maturities, two from TenneT for €1bn and two from Vonovia, also for €1bn. That takes the total IG non-financial issuance for the month to €6.1bn, and we can expect a hefty level of deals this week and most of next, ahead of the FOMC.

The Air Liquide transaction managed books of over €12bn, while the 2-year floater offered – in theory – a negative yield, given that pricing was tightened from initial guidance of Euribor+30/35bp to +20bp, and 3-month Euribor is -26bp. FRNs though are effectively floored at 0%, given that the clearing agencies have no way to demand money from investors, so although in theory it would be a negative yield, in reality it is 0%. However, several fixed deals which offer a negative yield at re-offer have already printed this year.

And the reality is that the ECB will be in the market later this week for at least a year and its bond holdings won’t be coming back out, whatever happens. It will be price-insensitive and to all intents and purposes issuer-insensitive, given the overall size of the market and what it can – in reality – lift. All the Air Liquide deals were eventually priced 7-17bp inside the initial guidance, while the others were around 10bp tighter versus IPTs.

Nykredit adds yet another buffer

Not particularly “smart nor unexpected”, but more an obvious and easy process, we would think. Nykredit issued the first “senior resolution notes” which in a distressed/wind-up scenario would take a hit before senior bondholders. nykreditThey have just stuffed in another layer of debt and an instrument which is senior to subordinated debt. It’s cheaper to issue than subordinated debt, but expensive versus senior, especially if the bank is not likely to be met with crisis dynamics such that it’s on the brink of going out of business – and we can be pragmatic here as to which ones are. So looking at it from a senior debt bondholder’s perspective, it becomes – effectively – a costly insurance contract for the borrower and one which, in many cases, we think will be unnecessary.

Time will tell if the product catches on, but we would look more to holding company and operating company structures and their non-uniformity across the sovereign nations of the EU as needing to be addressed first. Anyway, Nykredit paid midswaps+110bp for €500m of 3-year debt (kind of in line with Holdco debt for borrowers in the UK and Switzerland). That’s 15bp inside IPT, an enticing premium to existing senior debt, and the €2bn or so of orders suggest too good to pass up for investors for 3-year risk.

Lacklustre start to the week in trading

We shouldn’t have expected it to have been any different. A Monday in June was ever thus. Equities displayed little interest to push on, probably still concerned as to what the FOMC might bring. We closed a small up in European equities. Oil basked in the sunshine as we held above $50 per barrel throughout the session (for Brent). Government bonds took some respite too after last week’s stellar rally and were a small down in price (yields higher). Markets will be grappling with whether yields can still go lower over the next few sessions, or whether profit taking is the order of the day.

The 10-year Bund yielding 9bp just looks ‘wrong’, and we can understand why one would want to stay away from putting on any fresh longs from here. But when surveying the macro picture and the ECB’s policy response, that yield looks like it needs to go into negative territory. After the close here, Yellen was reported as saying that the jobs report was disappointing and the growth in jobs concerning. The impact on US Treasuries was modest, with the 10-year yield still higher at 1.72% (+2bp) while 2s/10s flattened a touch at 91bp.

As for secondary markets in credit, IG spreads inched a little better which left the Markit iBoxx IG corporate index yield a touch lower at 1.26% – a new 12-month low. It was the same for the high yield market, with the sector better bid for choice and spreads moved a touch better.

Have a good day.

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.