5th September 2019

Reading the tea leaves

MARKET CLOSE:
iTraxx Main

48bp, -1.3bp

iTraxx X-Over

245bp, -7.5bp

🇩🇪 10 Yr Bund

-0.60%, +10bp

iBoxx Corp IG

B+122.2bp, -1.5bp

iBoxx Corp HY

B+413bp, -8bp

🇺🇸 10 Yr US T-Bond

1.57%, +11bp

🇬🇧 FTSE 100

7365.44, (+0.50%)
🇩🇪 DAX

13283.51, (+0.65%)
🇺🇸 S&P 500

3091.84, (+0.35%)

It’s all good…

We are looking at record performance for Eurozone government bond markets for 2019. Unless it all falls out of bed – rates sell-off hard. And we just endured a torrid session for rates. Nevertheless, the nature of the beast is such that the sector usually delivers less than 1% or so of total returns in any given year. So those 10%+ of total returns year to date can be considered an option-like performance for this safe-haven plain vanilla product.

Alongside it, there will have been a brilliant AT1 market performance – perhaps in excess of 13% for euro-denominated CoCos. The high yield market will deliver an excellent result for investors (likely 10%+) just as many fret about the macro outlook. Investment grade will follow very close behind just as the headlines scream ‘over-valued, negative yields and a bubble waiting to burst’.

Inflows continue to be attracted to corporate bond funds with investors and asset allocators chasing previous and more performance. There has been a constant drum banging against adding corporate bond risk here, but if we can contain economic growth at these lower levels with interest rates so low, then rating transmission and default risks will remain subdued. IG investors will be repaid in most cases at maturity and the high yield market fraternity isn’t going to be too far behind.

The low (and declining) rate environment has boosted borrower plans to get more debt on board, and they haven’t been backward in coming forward – in the IG universe anyway. That debt issuance in some cases is for funding M&A, little of it is for investment but the vast majority of it is prudence – that is, refinancing or pre-funding future obligations at giveaways levels. Danaher’s blockbuster 5-tranche, €6.25bn offering on Tuesday was a case in point on the M&A financing front.

For the year to date, we are now up at €220bn and that matches the €220bn issued for the whole of last year – which was blighted by many periods of political event risk. The current run rate of IG non-financial deals will have us closer to €240bn by the end of the third quarter. Should that happen, it will take us to within touching distance of that annual €285bn (2009) record level come the end of 2019.


Glut, glut, glut

Primary markets delivered a glut of deals in a bumper session for IG non-financials. The sluice gates well and truly opened. And it was non-financials in investment grade where the day’s action was.

Wirecard lifted €500m in a 5-year at midswaps+110bp (-25bp versus IPT) with Continental also taking €500m in a 4-year maturity at midswaps+55bp (-35bp versus IPT). BT went for dual-tranche funding in the form of a 6-year transaction at midswaps+95bp (-20bp versus IPT) for €650m and a 10-year deal at midswaps+140bp for €750m (-15bp versus IPT).

We also had Snam in a 4.7-year deal for €500m at midswaps+55bp (-15bp versus IPT) and a 15-year tranche at midswaps+103bp (-27bp versus IPT) for €600m. FCA Bank was the day’s biggest tranche, as the borrower took €850m at midswaps+98bp in a 5-year (also -27bp versus IPT). Next up was DS Smith’s 7-year for €500m at midswaps+135bp (-35bp versus IPT) with Origin Energy taking 10-year funding at midswaps+120bp (-20bp versus IPT) for €600m.

We’re up at €17bn for the month so far for IG non-financial deals with not even a week gone for the month. Last August’s deal flow totalled €33bn.

There were other deals from Blackstone which came in a dual-trance for a combined €1.1bn (4-year €500m at midswaps+100bp and a 9.5-year at midswaps+200bp), while Leaseplan issued €1bn in a 4-year at midswaps+75bp (-15bp versus IPT).


What a session!

Credit market investors might have been glued to the primary market, but the big market moves were in rates and equities. In the UK, hopes by the market that a no-deal Brexit would be avoided saw Gilts sell off, the 10-year yield up at 0.59% at the close and top by 12bp in the session.

Agreed talks between the US and the Chinese in early October, a decent ADP payroll print and a solid ISM service sector print for August saw the 10-year US Treasury bounce 11bp higher to 1.57%. The S&P rose by 1.3%, as at the time of writing.

And, of course, the lessening in political tensions in the UK, Italy and Hong Kong all helped the risk-on mood during the session. Bunds were only going one way (lower in price) – and the yield rose to -0.60% (+10bp).

Equities rose across the board as they went up to 1% in Europe, with the strong sterling rally seeing to it that the FTSE was lower (-0.55%).

The credit indices were also factoring in the better mood and the cost of protection dropped. iTraxx Main declined 1.3bp to 48bp while the X-Over index managed a 7.5bp drop to 245bp.

The Markit iBoxx IG cash index was just 1.5bp tighter at B+122.2bp and obviously returns will have taken a hit as the underlying sold off. Still, the Street was tightening up prices and spreads were tighter across the board. The AT1 market was better (index -13bp, B+510bp) and the HY cash index closed 8bp tighter at B+413bp.

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.