26th September 2019

Pulling down the curtain on Q3

MARKET CLOSE:
iTraxx Main

56.3bp, +0.7bp

iTraxx X-Over

233.1bp, +2.1bp

🇩🇪 10 Yr Bund

-0.58%, unchanged

iBoxx Corp IG

B+124.6bp, unchanged

iBoxx Corp HY

B+413bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, -4bp

🇬🇧 FTSE 100 6382.41, (+2.61%) 🇩🇪 DAX 12487.36, (+3.88%) 🇺🇸 S&P 500 3122.87, (+1.24%)

Calm transcends the corporate bond market…

With just a couple of session to go, we look back at a rather mixed month for credit investors. Awash with new issuance and with the best month for IG non-financial deals since 2014, IG spreads only widened by 4bp (iBoxx index) and total returns have delivered a rare monthly loss for 2019, of 0.9%. Clearly, we can ascribe the weakness in spreads to the heavy issuance volumes (almost €50bn) even if has been extremely limited, where support for the market benefits from pent-up demand and the upcoming ECB purchase programme.

As for the near 1% loss in returns month to date, that is predominately rates-related, given the sharp reversal in Bund yields from off record lows from early September. The yield on the 10-year has risen from -0.71% to -0.59% currently, for example, with a similar move in the front end.

Higher-yielding credit risk has fared much better, though. Despite some recent weakness, the AT1 index has tightened by 38bp and total returns are at +1% month to date. Even the high yield market, has lost only 0.2% so far in September with index spreads 12bp tighter. While, in sterling, spreads on the iBoxx cash index are 1bp wider and returns at +0.1%.

The nub of it is rates and supply. The massive month in euro IG issuance has impacted spreads in IG. Sterling this week, in particular, has had a heavy issuance load, too. But Gilts have been firmer all month while euro safe-haven yields have been rising. Hence the relative underperformance this month in euro-denominated IG credit versus other corporate bond asset classes.

The numbers are small, though. Few will shed a tear that we haven’t quite had a positive month returns-wise for the IG market, especially after clipping at least 6.7% this year so far. Investors have been busy with primary and getting those portfolio cash balances absorbed ahead of the ECB. That clock ticks down, with just a month to go before they arrive – and we might see more support thereafter.


Scatty primary into month-end

We had a scatty day in primary with deals spread widely across the different financial sectors and just the sole offering in the IG non-financial market. And that plays out as it has in the previous sessions, after a very busy few weeks before that.

The sole IG non-financial deal came from Gasunie of the Netherlands, which issued in a 12-year maturity at midswaps+53bp for €500m, on book 4x subscribed and final pricing 22bp inside the opening guidance. The group is only the second IG non-financial corporate borrower this week (Thermo Fisher with €4.4bn being the other).

In financials, Mandatum Life issued €250m in a 30NC5 Tier 2 at midswaps+230bp (-20bp versus IPT) and Abanca Corp Bancaria issued a 10.5NC5.5 Tier 2 structure for €300m with a 4.625% coupon. Mexican finance company Credito Real priced €350m in a long 7NC3 offering to yield 5.125%.

In senior, Credit Mutuel Arkea lifted €500m in a 9-year social senior preferred issue at midswaps+70bp (-20bp versus IPT). SocGen issued in sterling, £250m of 5-year senior non-preferreds at G+160bp. The high yield market was due to price Monitchem HoldCo which was looking at €300m in a 5.5NC2 senior secured deal to yield around 5.25%, as well as a 5.5NC1 floater at around Euribor+525bp and a 7NC3 fixed deal to yield 10%.

Montenegro was the sovereign borrower of note, in for €500m in a 10-year priced to yield 2.8% versus 3% initial guidance and books 3x subscribed.


Laborious week drawing to a close

In the news, ABN was facing some heat as the Dutch prosecutors were investigating the bank in an anti-money-laundering probe. We had a profits warning from British Airway’s owner IAG with recent strike action set to dent earnings, while Pearson Group warned on weaker US student sales and Imperial Brands warned on US vaping fears.

In the UK, we were reeling from the overnight toxic atmosphere in parliament as the Brexit debate spiralled out of control. The markets, though, were generally upbeat and seemingly solely focused on Trump’s words that a trade deal was near.

Equities in Europe were on the up, the FTSE adding 0.9%, the Dax around 0.5% and (as at the time of writing) the US markets were generally lower by up to 0.5%. There was much jostling around how events might turn out regarding the declassification of the whistleblower complaint at the centre of impeachment proceedings against President Trump in the US.

There was nothing really doing in rates. Yields on the 10-year benchmark Bund closed unchanged at -0.58%, the Gilt closed to yield 0.52% (-1bp) although we had a bid for US Treasuries, the 10-year yielding 1.69% (-4bp).

Credit index exhibited another session of moderate weakness, the iTraxx Main index 0.7bp higher at 56.3bp and X-Over 2.1bp higher at 233.1bp.

In cash, nothing too exciting. Actually, the IG market closed completely unchanged leaving the iBoxx index at B+124.6bp. Similarly, the AT1 index closed unchanged at B+500bp as did the HY market, that index closed at B+413bp. Ho hum.

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.