6th July 2017

Running scared

MARKET CLOSE:
iTraxx Main

56bp, +0.75bp

iTraxx X-Over

253bp, +6bp

10 Yr Bund

0.57%, +10bp

iBoxx Corp IG

B+109.5bp, -2bp

iBoxx Corp HY

B+293.6bp, -3bp

10 Yr US T-Bond

2.37%, +4bp

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Still an inflexion point?…

When the Bund yields pops out of its year-long established range – to the upside, it’s news. And in Thursday’s session, the yield put it’s head above 0.50% as the 10-year benchmark rose to a high of 0.57% (+10bp). After a good year stuck in a 0.20 – 0.50% range, the last couple of weeks have seen it rise from 0.21% as Draghi’s speech sounded the death knell of deflation. The market has been running scared ever since.

There might be some borrowers who might look to get deals away before the rate markets rise further, just as there will be some investors who may welcome higher rates and thus higher bond coupons eventually – But total return investors are going to lose in the meantime.

The recent crop of Eurozone data has all been positive – the only stickler has been core inflation. The market is now betting that policy will become less accommodative quicker, and we knew it was going to happen sooner or later. The ECB minutes which were released on Thursday didn’t quite help us make up our minds, though, that it would certainly be case, as they played ‘the outlook’ with a straight bat. That is, being careful to continue to highlight the risks to the downside (in inflation) which might come from any exuberance on premature moves to reduce accommodation.

The summer months will give us a handle as to whether we are going back to the 0.20 – 0.50% range for the 10-year benchmark Bund yield, or whether we are going into the post-summer period from September looking at a new range, perhaps like 0.50 – 0.80%. Those higher yields didn’t help equities as they came under pressure from the prospect of higher funding costs which might eventually eat into margins, as well as from a strengthening euro. The one market to face the rate/equity changes/volatility head-on was again the corporate bond market. Spreads were very clearly tighter in the session.


A few more in primary

Deal of the day: Bankia

Once again, primary market deals had a ‘yield flavour’ to them. There was a CoCo/AT1 offering, a couple of high yield deals (with one to price on Friday) and a longer-dated peripheral ‘utility like’ transaction. They were all well-received.

There’s no stopping corporate bond market investors wanting higher beta risk on their books. They do, after all, offer bit of a buffer against (slightly) rising rates while giving one the added bonus of improvements in credit metrics as the economy recovers. Mind, investors would happily and are content to fund all manner of borrowers, parking cash with low beta corporates just to get some income.

So, on Thursday we had Italian highways group Atlantia issue €1bn at midswaps+102bp and managing to reduce the final pricing metric by 18bp versus the opening gambit for their efforts. But the Bankia AT1 deal was the pick of the day’s offerings. Going out with initial price talk of 6.5%, they printed €750m at 6% for the PNC5 AT1 structure off a €2.5bn book.

In high yield we had CMC di Ravenna price €250m in 5NC2 senior notes to yield 6.875%, while CMA CGM is expected to price up to €850m on Friday. The other high yield deal came from Kloeckner Pentaplast for €395m in a 6NC2 PIK Toggle note to yield 8.5%. In the sterling market, VW was back with an increased £350m 5-year deal.

The week’s non-financial issuance doesn’t read very well with just €1.5bn in IG. The high yield market looks much better and that’s even before the CMA deal is done and dusted on Friday (week’s issuance at €1,575m, before the CMA pricing).

There’s been nothing in senior financials, although the REIT sector has been busy especially with that massive Annington deal on Wednesday.


Cash credit making hay while the sun shines

Stock markets were off by up to 0.6% across the board, and government bonds lost some serious ground too. The 10-year Gilt yield was up at 1.33% (+6bp), the Treasury 2.37% (+4bp), Bunds settled at the session highs of 0.57% (+10bp) and OATs gave up almost 12bp in yield to 0.93%. Big moves.

The iTraxx indices were a certainty to widen into the weakness emerging from other markets, and it came as no surprise that Main eventually closed higher at 56bp (+0.75bp) with X-Over up 6bp at 253bp. As for IG cash, the Markit iBoxx index was down at 109.5bp, representing 2bp of tightening in the session and the lowest level this year.

Actually, we need to go back to May 2015 or the last time we got down to this level. The record low for this index is B+94bp. The return profile won’t look good after that back-up in rate markets though. The sterling market was 0.5bp tighter with the index at G+134.4bp.

And the tightening trajectory found its way to the high yield market as the index edged 3bp tighter to B+293.6bp, just a basis point off the record low we saw a week ago. While returns are being crushed in IG euro and sterling credit, they’re declining in more fashion for this shorter duration market.

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.