19th September 2017

Rising tides not lifting all boats…

iTraxx Main

49.6bp, -0.5bp

iTraxx X-Over

219bp, -6bp

10 Yr Bund

0.46%, unchanged

iBoxx Corp IG

B+107.3bp, -0.5bp

iBoxx Corp HY

B+284.3bp, -1.5bp

10 Yr US T-Bond

2.24%, unchanged

FTSE 100

7,275, +22


12,562, +2

S&P 500

2,507, +3

…Despite US milestones

Records might have been set – again – in US equity markets, but European investors are resisting the move higher into the US stock market slipstream, certainly as we might have expected. The rising tide certainly isn’t lifting all boats in this case and investors remain circumspect as to the sustainability of the US equity market rally. Tuesday’s session delivered plenty of issuance and a little bit was there for everyone, with the emphasis being on ‘little bit’. The deal in IG non-financials came courtesy of a 3-tranche deal from Engie, in senior financials a dual tranche print from Nordea as well as a green bond from Deutsche Kreditbank, and a Tier 2 deal from ING. For the REITs, Gecina offered up €700m in a long 10-year. There was nothing in high yield.

Dark day: Toys ‘R’ Us filed for bankruptcy in the US & Canada

Overall, we think that the market will be left a little frustrated with the levels of issuance at the moment, given that most would have been expecting a higher level of supply. We can expect that the FOMC will likely curtail much issuance on Wednesday, and so we are left with a couple of sessions after that to get us filled. Just €3.3bn has been printed so far in IG non-financials and nothing priced yet in high yield. Last week had a lower than expected €6.8bn of IG supply while the monthly total is up at €18.9bn. A decent heave – next week, perhaps – takes us to €30bn for the month.

For the session, European equities were mixed (mostly a little higher) but played out in small ranges with the Wall St momentum over the past few sessions failing to offer much of an uplift, as mentioned previously. We saw a better bid in rate markets initially which helped yields pull back a little but that faded as the session progressed. Cash credit maintained a positive tone without too much happening in secondary. Looking for an excuse, many participants might have been focusing on Wednesday’s new contract iTraxx index roll (from Series 27 to 28). Main Series 28 is expected to jump by around 8bp and X-Over by a little over 40bp once the new constituents are added.

In the news, Toys ‘R’ Us filed for bankruptcy in the US and Canada, but it had little impact on the market. The changing face of global retailing has likely taken in one of its biggest retail groups so far. There will be more casualties as the old business models become more obsolete and internet trade continues to rise. As a reminder, the default rate is firmly entrenched at historically low levels – and has been for the past several years.

And the deals…

Solo Engie: A 3-tranche €2bn deal for the French multinational electric utility company was the only deal of the day in IG non-financials.

France’s Engie was the sole borrower in the IG non-financial space with a 3-tranche €2bn deal taking in long 5, 11 and 20-year maturities and managing to take 8-17bp off the initial guidance, depending on the tranche (-17bp for the long one).

ING Groep was the latest bank to issue a subordinated deal as it took €1bn in a 12NC7 Tier 2 structure at midswaps+125bp – some 20bp inside the opening pricing gambit.

Nordea Bank added a combined €2bn split equally between a 4-year (floater) and a 10-year tranche and we had Deutsche Kreditbank issue €500m. The deals took the monthly supply total for senior financial issuance to €6.5bn.

The rest was SSA issuance in the form of covered bonds and state-owned financial institutions.

Markets already looking to the Fed

The much-limited session was probably a result of the market already looking toward the Fed meeting. While there is likely going to be no change on rates, the markets will be looking at any word on the trimming (extent/timing) of the Federal Reserve’s massive balance sheet of securities ($4bn+). Obviously any communication of a move to reduce will have an impact on the Treasury market in the first place, while some corporates might be apprehensive as to how funding costs might be affected (higher Treasury yields).

So in the session, flat to 0.5% (FTSE) was how it worked out for equities. There were fresh records in the US, even after a typically brusque speech at the United Nations from President Trump. As for government bonds, Bunds closed unchanged, the Gilt yield in 10-years moved to 1.33% (+2bp) while Portugal’s 10-year closed a couple of basis points lower at 2.44% but played out in a 2.37 – 2.50% range following that 30bp drop in the previous session after the rating upgrade to IG.

For the synthetic credit iTraxx indices, jockeying for position – and repositioning – into the new contract had Main lower at 49.6bp (-0.5bp) and X-Over 5bp lower at 219bp!

In the cash market, once again a limited session had spreads a touch better and the Markit iBoxx IG corporate bond index was tighter at B+107.3bp. The sterling market also edged better at G+135bp (-0.7bp) on an index basis highlighting the broad demand for fixed income corporate bond risk. The high yield market was similarly devoid of much interest and spreads edged better, the iBoxx index just 1.5bp better at 284.3bp. The Fed’s up next.

Have a good day.

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

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.