24th October 2017

Smashed: High yield supply AND spread records

MARKET CLOSE:
iTraxx Main

54.2bp, -0.2bp

iTraxx X-Over

238.0bp, -0.9bp

10 Yr Bund

0.48%, +4bp

iBoxx Corp IG

B+101.6bp, -0.9bp

iBoxx Corp HY

B+259.7bp, -4bp

10 Yr US T-Bond

2.41%, +4bp

FTSE 100

7,490.57, +42.45
DAX

13,103.56, +35.48
S&P 500

2,675.81, +23.80

Who’s afraid of risk?…

Wind Tre’s multi-tranche, multi-currency took us over the line – with great ease – to a record year for supply in the high yield market for euro-denominated corporate issuance. The high yield spread markets have been there for a week or so already. And we’re going to get more of both over the remaining weeks of the year.

The high yield market has been the success story of these ravaged, uncertain post-financial crisis years… as strange as that might sound.

In those years post-2008, we have had the Eurozone economy on the floor and normally we would have expected a high default rate to have busted the allure of this asset class. No such thing, as the slashing of policy rates alongside the extremely manipulative QE policies of the various central banks have made sure that the corporate sector has been able to withstand the dire economic conditions it has had to face.

Financing – or rather refinancing – of debt obligations, pushing out the so-called ‘wall of funding’ and allowing the disintermediation of funding (from banks to capital markets) at ever lower cost have combined to contribute to an amazing and almost non-logical success story. The European high yield market has flourished and grown rapidly. An effectively multi-year nil default rate and improving credit metrics with policy and market rates at low levels almost ad infinitum have seen to it that corporates and investors have been well rewarded since 2009.

The fickleness in some quarters is always demonstrated on days where we don’t necessarily go higher in US stocks or ratchet tighter in credit spreads. And it is then that ‘they’ think it is all over. Of course, with equities consistently posting record highs in the US and credit spreads everywhere posting record tights, fear that the end game is close is naturally stalking every investment decision. That should not be the case when one looks at the backdrop as to why we are at these elevated levels. The US economic outlook is brightening and the tax reform plan will provide a catalyst like we’ve probably never seen before if it is passed in its current proposed format. Europe is maintaining a steady pace in growth with just about all the current crop of data suggesting a firming in the economic trajectory. We ‘worry’ (so to say) about policy rates, tapering and that slow, stretched out return to policy normalisation.

In the meantime, the credit market has become very technical – starved of secondary market liquidity – so it is going to take a major disruption to the financial markets to have credit spreads back-up in any material way. New issuance hasn’t exactly delivered in IG financials and non-financials, but it has/is in the high yield market. Just as well, because that is where the money flows want to be invested. Investing for and seeking yield – the more the better with the commensurate level of perceived risk of course – is the modus operandi of the investment process.

And such has been the demand for HY paper, the compression in this market with IG has been very aggressive. That is, looking at the two markets from a cash index basis, the spread difference was 279bp at the beginning of the year and is now just 158bp. Oh yes, that’s a record too. The next stop is 150bp. The chart below shows the compression in the spread to the end of September.

HY-IG Spread Difference


Wind Tre dominates as IG issuance slumps

A tap for Engie while Wind Tre steals the show

After a heavy day of issuance on Monday, Tuesday’s effort was a damp squib for the investment grade market. Italy’s 2i Rete Gas, which is the second largest gas distribution operator in that country, visited for the second time this year, this time for €550m in a 10-year transaction at midswaps+70bp, which was just 5bp inside the opening pricing mumble. The book was at only €750m. France’s Engie was the other borrower in IG, tapping its September 2037s for €100m.

It was almost as if the bankers had advised borrowers to stay sidelined because the focus of the market would be on the multi-tranche Wind Tre deal. Whatever the reason, this borrower came unopposed and commanded the full attention of the market. And rightly so as it raised €7.325bn equivalent in euros and dollars. The euro-denominated tranches came in 5, 6, and 7-year maturities (with various short dated calls) and for €1.625bn, €2.25bn and €1.75bn, respectively. The dollar trance was for $2bn.

The monthly total for IG issuance rose to €11.6bn, which makes this month so far the third largest month for HY supply since 2014. And the YTD total rose to €59.8bn, making this year already the best ever for the high yield market.


Earnings, equities, credit records and all that

McDonald’s, 3M and Caterpillar all beat earnings expectations for the past quarter and painted a rosy picture for the near future. Add in the potential for success on the Trump tax reform plans, and the US equity markets decided to gain back much of Monday’s losses. The Dow Industrial index shot higher by almost 200 points, outperforming and setting a new record high as it rose by 0.8% versus just 0.2% for the broader S&P500! So while US stocks were pushing higher, European equities were more subdued in their push, managing only small rises as markets here likely were waiting for this week’s ECB gathering.

Rising equities on an upbeat economic assessment means little need to add any government bond risk and we saw a bit of a sell-off in safe haven bonds. US Treasuries, in 10-years, saw yield back up to 2.41% (+4bp) while the equivalent maturity Bund yield closed in on 0.50% as it closed at 0.48% (+4bp). Gilts also suffered with the yield there at 1.35% (+4bp).

In credit – and in line with the subdued equity performance for European stocks, the iTraxx indices edged better with Main lower at 54.2bp (-0.2bp) and X-Over 0.9bp lower at 238.0bp.

As for cash, we continued to grind tighter and the Markit iBoxx index for IG corporates closed at B+101.6bp which was almost a basis point lower than the previous session and leaves us less than 8bp away from the record low level for this index. As for the record theme, well, the CoCo index was spinning them as it dropped through the 400bp level to B+397bp (-9bp). That’s an index total return of 15.3% for this year to date!! Scary stuff.

And finally, the high yield market continued squeeze tighter and the index was left at a new record low of B+259.7bp (-4bp). Enough said!

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.