27th September 2018

September squeezed dry

MARKET CLOSE:
iTraxx Main

67.1bp, -0.4bp

iTraxx X-Over

267.1bp, -1.4bp

🇩🇪 10 Yr Bund

0.53%, unchanged

iBoxx Corp IG

B+129.4bp, unchanged

iBoxx Corp HY

B+376.3bp, +0.5bp

🇺🇸 10 Yr US T-Bond

3.07%, unchanged

🇬🇧 FTSE 100 6185.62, -108.90 🇩🇪 DAX 12901.34, ERROR 🇺🇸 S&P 500 3372.85, ERROR

Issuance run ends, for good reason…

We had a quieter session on Thursday and it looks like there could be a premature end to the month’s activity. It’s been an excellent one, to be fair. But it was still a bit of a surprise – given that we were all guns blazing and ignoring the potential for event-risk to stop the party. That said, we concede that it was probably no bad thing that the primary market was less effusive because it allows the heavy load of recent new issues to be absorbed. After all, we have had €10bn of IG non-financial issuance in just three sessions this week. The month is now the best of the year so far with €33bn in the bag.

Importantly, any potential for investor indigestion brought on by a deal overload will have been prevented.

It could be that the potential for turmoil in Italy, as the main coalition partners pushed for the next budget to include a basic universal income, tax cuts and a lower retirement age was the reason we pulled back from there being a busier primary market. Certainly, there was the potential for the technocratic Finance Minister to quit as that demand for an increase in the budget deficit was aired – at the last minute. The Italian debt market was shaken out of its complacency.

Further, those higher US rates likely through 2019 will come now at a slightly slower pace than previously envisaged as a moderately hawkish Fed rate policy is comforted by strong and sustained domestic growth dynamics – and inflation seemingly under control. However, they’re going higher and are going to heap much pressure on EM-based dollar funders. So the overnight weakness in Asian markets carried through to European markets and we traded through an initially moderately risk-off session before succumbing higher as US markets pushed on at their open.

Nevertheless, it was the Italian situation that riled. It’s been a while since 10-year BTP yields jumped higher by 10bp or more, but they did just that as the yield on rose to 2.96% (+12bp) before settling at around the 2.90% mark. Italy did manage to raise €5.25bn in an auction of 2, 5 and 7-year maturities. Safe-havens managed a mixed performance as a result, with the 10-year Bund 3bp lower in yield at 0.50% at one stage before giving up the gains.

Gilts were also better bid earlier in the session but closed unchanged with the 10-year yielding 1.59% while UK equities were higher throughout – most probably helped by comments that the Labour party might ‘bend their red lines’ to help the Conservatives secure a Brexit deal that they could live with.


IG primary draws a zero after €10bn

So after a near €10bn spate of deals in just three sessions, IG non-financial issuance drew a blank on Thursday. There were deals though. We had the usual spate of covered bond issuance while the corporate sector had high yield borrowers take on the baton.

James Hardie Industries’ 8NC3 deal was upsized to €400m and finally priced at 3.625%, while the unrated (likely high double-B implied) Bureau Veritas issued €500m in a long 6-year at midswaps+130bp (-15bp versus IPT, books around €1bn). Avis Budget Finance in a long 7NC3 for €350m was due to price and we have EL Corte Ingles due with €600m on Friday.

That’s another €900m for the high yield market and €6bn for the month for HY deals. More interestingly, we’re up at €55bn for the month and are €20bn short – with three months of the year to go – to get to a fresh annual record of issuance. This year is already the third best year on record but we are just €2bn short of the full-year total of €57bn seen in 2014. We could be past that level by the end of next week.

The senior financial representative was Credit Mutuel Arkea which took €500m in a 5-year at midswaps+50bp, and SocGen was still to price $1bn of AT1 notes in a PNC5 deal at around 7.50%.


US leads the way, again

US GDP for Q2 was confirmed at running at an annual rate of 4.2%, in line with expectations and at the highest level for almost four years as consumption and business investment rose sharply. The Fed’s preferred measure of inflation (the PCE) rose slightly to 2.1% in Q2. Separately, durable goods orders posted their biggest rise in six months in August.

So all good for the US and a more buoyant domestic economy will have less of a global impact than it might once have had – given the reduced level of global participation that the current administration is undertaking. The impact will be felt with consumer confidence, investment, spending and growth running at lower levels in say the Eurozone.

US stocks dusted themselves down and roared ahead after ending in the red in Wednesday’s session (S&P +0.7% at the time of writing). That helped a more mixed European session become a positive one with stocks up by around 0.5%.

The better bid for rates was thus faded into the close and most markets closed unchanged or thereabouts. 10-year bunds were yielding 0.53% at the finish, Treasuries 3.07% and BTPs were left as the underperformers yielding 2.92% (+8bp).

In the synthetic world, iTraxx Main edged lower to 67.1bp and X-Over to 267.1bp (-1.4bp). In cash, and for the third session in a row, the IG cash market closed completely unchanged with the index at B+129.4bp (and the same in sterling credit – no change). In high yield – the same, no change with the iBoxx index at B+376.3bp.

We will be back for the start of October. Have a good day.


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

Suki Mann

A 30+ 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 CreditMarketDaily.com.