11th September 2017

Risk back in vogue

iTraxx Main

52.0bp, -1.5bp

iTraxx X-Over

228bp, -6bp

10 Yr Bund

0.34%, +2.5bp

iBoxx Corp IG

B+111bp, -1bp

iBoxx Corp HY

B+300bp, -1bp

10 Yr US T-Bond

2.13%, +7bp

FTSE 100

7,413, +36


12,475, +171

S&P 500

2,488, +27

Getting down to business…

Hurricane Irma’s ferocity wanes, it’s quiet in North Korea, new issue mandates are dished out like confetti (especially in high yield) and the markets are feeling there old usual self. That is, we kicked off the week in positive form with risk assets rallying and safe-havens feeling a little less loved than they have done of late.

Primary piped up with a few deals to get us off to a good start and we are looking for €10bn+ of non-financial IG issuance, while the high yield market could deliver €3bn+ given the pipeline. We have mentioned these past few weeks that September will deliver. As well as gushing primary, we think that the confidence gained from the receptivity of investors to the deal flow will feed through into the secondary market.

We can expect the recent tights in IG to be tested again, but we will need equities to hold up and limited amounts of macro and geopolitical event risk to support the tightening in the high yield market. We are comforted by the more limited moves in the high yield market of late, given the higher levels of volatility in equities. That’s a good sign, and shows that there has been a limited selling bias by investors when we have had some equity weakness (on North Korea, for example).

The Markit iBoxx indices, for example, have widened by 8% and 5% for IG and HY, respectively, off their 2017 lows – and that’s off the record lows for the high yield index. So we don’t think it will take too much of an effort for them to regain those previous levels. That’s about 8bp for IG and 25bp for the high yield index.

At least the iTraxx indices are suggesting that we’re heading into a better period as they continue to edge lower and visit the recent lows for Main and X-Over.

Our view remains that we believe this final third of the year will be kind to the credit markets and returns will stay firmly in the red, spreads will see a tightening taking us back to record lows in HY with an outside chance we get the same in IG. Higher beta risk will generally outperform with the CoCo index returns likely to see 15% (currently 12%) by the time we get to year-end.

Primary wakes up early

Merlin was back among the borrowers, along with a host of regulars

We started the week in effusive fashion with plenty of corporate deals. Asahi Group was probably the pick of the bunch with a rare offering in 4-year and 8-year funding for a combined €1.2bn taking 20-25bp off the opening price talk.

France’s Vivendi took 15bp off the initial guidance to price at midswaps+55bp for a 7-year deal totalling an increased €850m. Italgas priced €500m at midswaps+72bp (-12bp versus IPT) in a long 12-year transaction.

Spanish real estate group Merlin Properties took €300m in 12-year notes. So, €2.85bn on the opening day of the week represents good business and has us on target for that €10bn+ week in non-financials. The month to date total comes in at €11.6bn.

In sterling, Anglo-Dutch giant Unilever issued €500m equally split between 7-year and 12-year maturity tranches. The high yield market will open up proper, probably Tuesday (Monday drew a blank), but we did get a late pricing of the €300m Belden issue (8NC3, 2.875%).

And we added some financial deals in the session. Sweden’s LF Bank issued in 5-years for €500m, NAB in 7-years for €500m – both senior, and in the Tier 2 sector, KBC was issuing 12NC7 debt to the tune of €500m. The senior deals take the monthly total to €2.5bn from four issuers.

ECB continues to support valuations

As for the ECB, the haul of non-financial corporate debt last week came in at an improved €1,766m versus €1,073m in the week prior. And with it, the ECB is back with some vengeance!

The equity markets were admittedly choppier last week, but that €1.77bn of bonds purchased probably goes someway to explaining why corporate bond spreads didn’t widen much at all and played out in a narrow range. The Markit iBoxx IG cash index was left in a +/-1bp range, while even the HY index moved in a tight +/-2bp context.

ECB weekly purchases

The total purchases to date, after 66 weeks of market participation, stand at €109,073m with the long-term weekly average purchases at €1,652m.

Equities lead the charge

With Hurricane Irma event-risk fading, we saw a solid rally in risk assets in the session. European stocks, already firmly in the black, were given a further push as the US opened for business in bullish fashion. The S&P was closing in on intra-day record highs (as were the Nasdaq and Dow).

While gains of up to 1.4% were observed in equities bourses, the loser was the safe-haven asset. There’s little need for it when the market is on the up, after all. So government bonds gave some of their recent stellar gains back seen mostly in the US. We had the 10-year US Treasury yield off recent lows to 2.13% (+7bp).

The European market reacted less severely with the 10-year Bund yield up at 0.34bp (+2.5bp) and the OAT yielding 0.63% (+1bp). Gilts were under pressure as the overnight EU (Withdrawal) Bill’s Parliamentary vote loomed, the 10-year yield backing up to 1.04% (+5bp).

As for the credit markets, the risk-on tone was a ‘gimme’ for the synthetic market to have protection costs drop. Recent weakness in single name reinsurers was mostly reversed (and will fully be so over the next few sessions). iTraxx Main was left at levels not seen for a while, at 52bp (-1.5bp) and X-over likewise at 228bp (-6bp).

The fightback in cash also started, with the cash iBoxx index at B+111bp (-1bp) amid little turnover/volumes in secondary. In high yield, we edged better such that the index closed at B+300bp (-1bp).

We’re set for a much better day on Tuesday.

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.