5th July 2018

Primary needs to flow

MARKET CLOSE:
iTraxx Main

71.7bp, -1.1bp

iTraxx X-Over

312.2bp, -3.8bp

🇩🇪 10 Yr Bund

0.30%, -1bp

iBoxx Corp IG

B+136.2bp, -1.3bp

iBoxx Corp HY

B+407.3bp, -6bp

🇺🇸 10 Yr US T-Bond

2.83%, -1bp

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Before we put our feet up…

Primary is needing to flow again

The US Independence Day splurge of deals in Europe was not to be repeated in Thursday’s session which fizzled out to be much more of what we might have expected when into holiday mode.

Fresenius’ €500m deal on Wednesday is the pick of the bunch for this week’s IG non-financial borrowers – the blue-chip, classy German medical group being one of the few that would get investors clamouring for its bond offerings any day of the week. Issuance, more generally, has been in the doldrums though – all year.

The level of deal flow this year has been confusingly light (we could describe as slumped), given one might have thought that it was last chance saloon to lock in still near historic lows in funding and boost balance sheet cash for that investment and M&A splurge to come.

A more pragmatic take on it and approach, though, is to realise that rate markets are going to play ball for a good while yet. The ECB isn’t moving until after the middle of next year. The macro outlook is riddled with event risk. A Eurozone downturn/trade war won’t kill off the credit markets (they will have a greater impact on other markets though).

Credit investors have lived through 10-years of low – or anaemic – levels of economic growth where historically, the default rate would have been well over 5% per year on the back of those lower growth rates. No. That rate popped to 13% in 2009, but has held below 2% (mostly) in the years since. Rate market (QE and the like) manipulation has done its job.

So there ought to be a relaxed feeling about how funding costs for the corporate sector might evolve. Spreads are wider and new issue premiums are higher this year, but rates have offered a little offset and more importantly, the back up in spreads and new issue premiums is hardly any hardship. Demand is still very high and we have seen that in the June deals, where subscription levels for new issues rose into the 3x or more area.

Going back to the slump in primary, we fully anticipate that the market remains open for another couple of weeks, before the holiday season really kicks in. And it’s open because the level of issuance has come in much lower than anyone could reasonably have envisaged for 2018. Investors will hang around for deals until the last moment. Even this week, for example, we’re scraping the barrel with the €2.5bn of IG non-financial issuance and as we suggested previously, €10bn would be a great result for July’s issuance!

The high yield market has only opened its account for July because of the €175m Autodis tap, but this market lighter deal flow of late forgivable owing to the record 6-month level of deal flow, which sits at €41.8bn.


New issue market limping along

French car leasing group ALD SA and technology corporate Safran SA tapped into the demand for short-dated floaters, investors happy to take down the risk as a means to park up some of their burgeoning cash balances. The rest of the day’s deal flow was a flurry of covered bond issues and Province of Quebec in sterling.

So Safran issued in a 2-year floater format totalling €500m at Euribor+33bp and after a book of €1.3bn managed to reduce the final pricing by 12bp. Car leasing group ALD was back for €500m in 3-year floating debt priced at midswaps+62bp (-8bp versus IPT) and off an €800m book.

That was the day’s rather limp plain vanilla corporate primary supply and with Friday’s non-farm report to look forward to, we’re probably done for this week.


Taking no chances

For the most part, the market was in no mood to make any decisive moves – ahead of the non-farm report and the imposition of those US tariffs against Chinese imports on Friday. But we did see a bit of a late rally leaving things looking better European close. Equities were sharply higher, but they didn’t quite manage to hold on to the best levels seen through the session, the DAX up at the close some 1.2%, having been higher than that intraday.

Rate markets were better bid, which left the 10-year Gilt yield at 1.26% (-1bp), the US 10-year at 2.83% (-1bp) and the Bund at 0.30% (-1bp). BTPs underperformed as the 10-year yield rose to 2.71% (+6bp).

As for credit, it went with the flow and the synthetic indices edged lower into the improved equity tone leaving iTraxx Main lower at 71.7bp (-1.1bp) while X-Over was 3.8bp lower at 312.2bp.

The cash market was trading out with holiday form but was marked better, the iBoxx index left at B+136.2bp (-1.3bp) and the high yield index at B+407.3bp (-6bp).  A rare reversal!

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.