6th December 2017

Primary rocking, secondary sleeping

MARKET CLOSE:
iTraxx Main

48.5bp, +1.2bp

iTraxx X-Over

235.2bp, +7.2bp

10 Yr Bund

0.30%, -3bp

iBoxx Corp IG

B+98.9bp, +0.3bp

iBoxx Corp HY

B+298bp, +5bp

10 Yr US T-Bond

2.32%, -3bp

FTSE 100 , DAX , S&P 500 ,

Nervous shakedown…

A Wednesday in December is what it took to shake the markets out of their slumber. We’re not really sure why equities were under some pressure because there wasn’t an obvious trigger (although Asia was weaker overnight).

Profit taking usually is the excuse, but why the firm bid for safe-havens? And when safe-havens are better bid, Gold is too – and these days, Bitcoin joins that party as it rose by over $1,000 to shoot past $12,000 a coin. It’s worth a mention! German factory orders rose unexpectedly in October and that economy is going great guns, so why the 10-year Bund yield managed to drop to below 0.30% in the session, and fails to rise much higher than 0.40% at any other stage (of late), is anybody’s guess.

The UK is still gripped by Brexit fever, but there is little impact on the broader market coming from it. Gilts are not reacting to the unfolding events – or lack thereof, nor are the credit markets. They have been a beacon of stability, if anything. Sterling might have come under some pressure which has had the effect of making equities look cheaper and supported a better bid for UK stocks. Away from that, the news flow was light in the session and there was little to get excited about.

We would think that any significant weakness from now until year-end should present itself as an opportunity to ‘buy the dip’. Because we are bound to start the New Year on the front foot, as is usually the case and especially so in 2018 given that the global economy is in good shape and will look to kick on through 2018. That’s easier done in the equity markets where there is obvious liquidity to trade. In the credit markets, we are hamstrung by the poorest levels of secondary market liquidity ever seen – and it just gets worse.

A decent bid in times of stress, or a decent offer into more positive markets are a rarity (mind, they always have been). The early bird usually catches the worm in both situations. So looking to buy on dips is manifestly very difficult. Hence the focus on the primary market. And so while there is much volatility at times in equities, credit seems to have had it pull back a few weeks ago, and is now trading in a narrow band (in high and low beta risk markets).

It would appear we are going to stay that way now into the end of the month. If so, investors will be pleased with the levels of performance across the corporate bond market for the year.

Total returns of 2.5%+, 6.5%+ and 17%+ in IG, high yield and CoCos on benchmark spreads tighter by 36bp, 120bp and 280bp, respectively represent a stunning level of performance for this fixed income asset class – given the state of play around the level of rates/spreads when we started the year.


IG roars back in primary

Volkswagen Bank: Issued €2bn in deals in a single day

The primary market was a little more expressive than of late. We had several investment grade deals. Aeroports de Paris was first to price with a €500m 10-year maturity offering at just midswaps+25bp off a €2.3bn book and 15bp inside the opening talk. Next up was the lower rated (by 2 notches) Deutsche Post which also went for 10-year funding at midswaps+30bp for €500m – and also priced 15bp inside the opening guidance.

And then we had a 3-tranche offering from VW Bank in the form of a 3.5 year floater (€750m, Euribor+42bp), 5.5-year fixed (€750m, midswaps+52bp) and 8-year fixed (€500m, midswaps+80bp) deals. Combined books for the €2bn of deals were over €7bn and pricings 10-18bp inside the initial price talk.

The deals take the total for the month in IG non-financials to just under €5bn and for the year to date to a fairly meaty €263.5bn. 63% of December’s deals (see below) have come from German-based companies, after it issued the second most IG deals in value for November at €5.75bn.

In high yield, we had Perstop take €250m in a Sept 2022 maturity at Euribor+425bp alongside a €235m Dec 2022 deal priced to yield 10%. The market for high yield primary is in top form, and there are €2bn+ of deals slated for pricing in the high yield market on Thursday and Friday (Picard, Pro-Gest and possibly PIK notes from Burger King being amongst them). We are going to shoot past €75bn of issuance for the full year (currently at €73.3bn).


Uncertain markets

Equities managed to claw back much of their losses in Europe, while US stocks were little changed for most of the session, probably not knowing how to take the news that President Trump was about to recognise Jerusalem as Israel’s capital.

The bid for safe-havens saw US yields lower, the 10-year at 2.33% (-3bp) while Gilt yields rose off their session lows to close 2bp lower at 1.22%. In the same maturity, the Bund closed at 0.30% having seen lower early on.

The credit indices failed to weather the early storm and ended the session higher. Protection costs rose, leaving the synthetic iTraxx Main index at 48.5bp (+1.2bp) and X-Over give up 7.2bp to 235.2bp.

The cash market was a touch weaker, but with little of the fanfare we might have seen in stocks. Flows were light. IG spreads as measured by the Market iBoxx index were 0.3bp wider at B+98.9bp and we are flat on the week.

In the high yield market, the weaker tone in other markets weighed a little as we might expect, and despite their being little activity, spreads were marked wider, the iBoxx index left at B+298bp (+5bp).

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.