Reloaded & ready to go again

Roll up those sleeves... We are having that pull back in spread markets. That little reminder that markets don't go in any direction for too long before they correct. We had been in bullish mode for well over two months and the weakness last week was probably a timely reminder of the over-exuberance in the market right now. Nevertheless, Tuesday's session was a good one for the corporate bond market but with just about all the focus on primary. Borrowers flooded us with deals in euros and sterling, leaving secondary to follow (a little tighter) amid no real interest by investors to get involved. Deals came from the likes of EdP, PostNL, Toyota and Iberdrola in euros but the biggie was British Telecom's 3-tranche foray into the euro and long-dated sterling markets. Offerings are somewhat a rarity from this borrower. The news flow was good, as German GDP for Q3 topped estimates coming in at 0.8%, the same was observed in Italy with Q0Q GDP up 0.5% while industrial production growth in the Eurozone slowed to 3.3% in the year to September (versus the year to August) but did beat expectations. In the US, producer prices rose much more than expected, and might have put a dampener on risk assets with some thinking that a US rate rise might materialise before year-end. So we can be fairly certain that the Eurozone economy is on a surer growth footing, the US is doing more than its fair share, too, while the UK lags but is by no means dead in the water. From just a fundamental perspective, corporate credit metrics are going to improve - for both non-financials and the financial sector. On the dreaded (for credit investors) M&A front, there are a few big deals in the process of being (or attempted at being) executed, but we don't see much to worry investors as yet of big cash/debt financed deals (higher leverage). That cyclical upswing seems to have been lost somewhere in this financial crisis. But while balance sheet strength generally is solid with corporates sitting on huge piles of cash raised at historically low levels, it does afford them a level of comfort and anticipation - for M&A and/or investment should the opportunity arise. With that in mind and policy accommodation still in place (and likely to stay that way through 2018) the dreaded 'correction' doesn't look imminent. The fear of it always comes up when we don't simply go higher in stocks or tighten in spreads - without thinking. In our view, we believe that the lows will be tested again in high yield and CoCo markets - where we need 28bp and 52bp of tightening to occur, respectively. We didn't quite reach the historic lows (tight spreads) on the iBoxx IG cash index but we likely will there, too. We got to within a basis point of it and now we are 5bp away. For all that to happen, we might need some good news on tax reform as that will boost confidence in markets. Otherwise, any slow grind tighter might not be enough to see it happen this year, anyway. Primary flurry keeps the chill away To Tuesday's deals, and EdP issued €500m in a 10-year deal at midswaps+73bp, taking 17bp off the initial price talk. Next up was PostNL which took €400m in a 7-year maturity priced at midswaps+55bp, which was 20bp inside the initial mumble. Toyota Motor Credit printed a combined €1.2bn split equally in a long 3-year green issue with a 7-year transaction as well, between 8-12bp inside the opening pricing gambit.As for BT, they were in for 7-year euro-denominated funding for a massive €1.1bn at midswaps+62bp (-13bp versus IPT), with £750m combined in 14-year and 30-year maturities. Finally, Iberdrola chipped in with a massive €1bn PNC5.5 hybrid priced to yield just 1.875%, some 37.5bp inside the initial yield talk. Who is looking for a 'correction' in credit spreads? Because these deals are being taken down with disregard as to the potential for one! That deal from BT propelled the UK as the country with the largest Euro IG issuance since July 2017 at €14.125bn. France (€13.95bn) and the USA (€12.85bn) are not far behind while Germany is unusually quiet with just €6.45bn (just 7.7% of the overall IG issuance in the same period). The session delivered €4.2bn in IG non-financial issuance and at the half way stage for the month, we are up at a superb €18.6bn worth of deals - and already ahead of the €17.8bn issued in October. The annual total so far is now up at €246bn and looks entirely respectable, with €260 - €265bn looking quite possible before year-end. There were several deals in the covered space, Adecco plumped for dollar finding for $300m, while Italian investment bank Cassa Depositi e Prestiti was in for €500m in a 'social bond' issue. Late on, Matterhorn Telecom priced its €400m 10NC5 issue to yield 4%. That's €3.4bn of HY issuance this month so far, and we are now up at €65.2bn for this record-smashing year. Unease in the markets Equities had another uncertain session, and were lower by up to 0.3% pretty much across the board. Safe-havens were slightly better bid and yields edged lower as a result. The 10-year benchmark Gilt yield was at 1.32% (-1bp), Bunds 0.40% (-2bp) and US Treasuries were yielding 2.38% (-2bp) in the same maturity. Peripherals were unchanged with Bonos yielding 1.53% and BTPs 1.82% in their 10-year benchmarks. In the synthetic credit space, and following a more constructive effort on Monday, we gave way to weakness and the cost to insure credit rose a little. iTraxx Main closed at 52.6bp (+0.8bp) and X-Over gave away a little more to close at 249.2bp (+5.4bp). As for cash, we had some weakness again, but that was really because of the general soggy backdrop. Overall, it left the Market iBoxx IG cash index wider again at 99.4bp (+1.5bp) while the higher yielding CoCo area didn't really do much, just 4bp wider. That suggests to us that weakness is very 'optical' and isn't promoted by any material selling cares. And the same goes for the high yield market, where the iBoxx cash index closed at B+283bp (+6bp) amid little flow to justify it. Have a good day. For the latest on corporate bonds from financial news sources, click here.

Reloaded & ready to go again

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Suki Mann

September 2019
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