19th June 2017

Rollin’ rollin’ rollin’

iTraxx Main

55.5bp, -2bp

iTraxx X-Over

231.3bp, -7bp

10 Yr Bund

0.28%, unchanged

iBoxx Corp IG

B+116bp, -1bp

iBoxx Corp HY

B+304bp, -2bp

10 Yr US T-Bond

2.19%, +3bp

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Risk-on dynamic gets the week’s ball rolling…

The EU/Brexit talks were the focus of attention on the political front, but the rise in asset prices which continued in the opening session of the week was the focus for the markets. Sterling credit didn’t weaken and we think that UK equities will fluctuate to the various daily tones emerging from the negotiations.

In a positive session for risk assets, we didn’t quite get record level in European equities but we closed not far off them, while just a session or two of 1%+ gains will see us over the line in some markets. But it also meant going tighter (spreads) and lower (yields) for credit where the high yield market set new records for both.

The euro-denominated deal flow in the session was around the investment grade sector and, given the low total of deals so far in June, Monday’s effort was most needed. In the session, €2.1bn was issued from 3 investment grade rated (or implied rated) borrowers taking the monthly total to €15.4bn. It is going to be a close call as to whether we get the €30bn of issuance we might have thought of being a reasonable target for June in IG non-financials. Still, we will not scoff at it because if we don’t, it ought to help secondary stay better bid through any bouts of volatility which impact stocks and/or government bonds. For the year so far, we’re up at €143.5bn.

For once, the session wasn’t maligned much in the way of event risk. We’re not sure what the driver was for the better tone was, either. It helped that in the early part of the session we got some guidance as to the tone for the session from US equity futures markets and the DAX in particular made a good push towards its previous record high. Sovereign risk didn’t necessarily come under too much pressure (if any) with just the most modest of back-ups seen in yields.

Corporate bond purchases increase

Having accumulated €1,421m of debt two weeks ago, the latest ECB data showed that the central bank had lifted an increased €1,592m of IG non-financial corporate debt last week (see chart, below). That’s more than the supply that issued in IG non-financials (of €1.5bn) – not that it necessarily matters, but is an interesting aside.

It is also incredible that the ECB has lifted some 15% of the eligible corporate bond market in IG and yet spreads here are still 20bp off the record tights. The lack of a secondary float is probably seeing IG investors stick with primary and what they can get in high yield.

ECB weekly purchases

The total purchases to date, after 54 weeks, stand at €93,719m, with the long-term weekly average of purchases at €1,736m. The technical dynamic of this enormous effort by the central bank for over a year now highlights how the crowding-out of investors in IG markets coupled with the low yielding rate markets have combined to have a disproportionate impact on the super performance in terms of spreads, yields and returns in the high yield corporate bond market.

Primary delivers some solid deals

In the primary market, Danaher became the latest US compiled borrower to visit the euro-denominated markets as it took a combined €850m in a dual-tranche deal made up of a 5-year floater and a 10-year fixed maturity. The borrower also managed to reduce the final pricing for the deals by between 10-18bp.

The unrated French issuer Plastic Omnium was up next and raised €500m in a 7-year transaction at midswaps+95bp – and achieved a 25bp reduction in the pricing versus the initial guidance. Finally, for the non-financial sector, the UK’s Compass Group printed in euros and sterling. The group’s 7-year, €750m at midswaps+35bp achieved a tightening of 20bp versus the initial guidance, while the sterling component for £250m at G+90bp was an impressive 15bp tighter versus the initial guidance (12-year maturity).

In financials, Clydesdale Bank issued £300m in an 8NC7 Holdco structure at G+250bp and the demand for this structure offering some good pick-up in incremental yield saw to it that the borrower reduced the opening pricing by 37.5bp.

Credit shines, too

The DAX isn’t far off its it’s record high. The S&P closed at it. Government bond markets didn’t massively sell off. And credit markets had a good session. In the synthetic arena, we had the Markit iTraxx Main index left at 55.5bp (-2bp) and a new multi-year low with the X-Over index down at 231.3bp (-7bp) – and the same as far recent lows are concerned.

The cash market squeezed some more and it left the Markit iBoxx index at B+116bp (-1bp) albeit amid little market activity. Into the start of those Brexit talks, even the sterling market was better bid, leaving the index down at B+135.6bp (-1bp). With equities on the up, no issuance and strong correlation between the asset classes – the high yield market was always going to tighten.

And we saw a new record low in the index, at B+304bp (-2bp) with a new record low on the index yield at 2.81% (-1bp). That means funding costs for corporates will continue to decline, and with the sector refinancing quite aggressively, the wall of maturities are pushed out further. Refinancing risk declines, the default rate stays low and the cycle continues.

High yield? What’s not to love about this market at the moment!

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.