27th October 2016

Sock it to me

MARKET CLOSE:
FTSE 100
6,958, -60
DAX
10,709, -47
S&P 500
2,139, -4
iTraxx Main
71.5bp, +0.5bp
iTraxx X-Over Index
321.5bp, +1bp
10 Yr Bund
0.08%, +6bp
iBoxx Corp IG
B+121.4bp, -0.6bp 
iBoxx Corp HY Index
B+404bp, +3bp
10 Yr US T-Bond
1.79%, +4bp

Knockout issuance…

The floodgates opened

The deal floodgates finally opened

Verizon, Merck and Orange filled the coffers on the IG non-financial front – and we’re delighted they have. After €6.2bn on Tuesday from one borrower (Danone), we had another €5bn in yesterday’s session. And we passed the €20bn mark for issuance this month. At one stage it looked like we wouldn’t get there, but we’ve had a relative deluge in the last two days.

It takes us to October being the sixth month this year where supply in IG non-financials has exceeded €20bn, while for the YTD we are up at €240.5bn. That’s very good. We would think that with likely six weeks worth of business to come – and an interruption around the US Thanksgiving period to take into account – that €270bn would be a reasonable target before we close out this year. Not a record, but only €20bn or so short of the 2009 deluge.

So Merck & Co visited the European markets for a combined €1bn in 8 and 20-year funding and managed to tighten up the pricing by 12-20bp inside that initial guidance, the longer tranche squeezing out the most juice. Orange’s long 10-year for €750m was priced 15bp inside the initial chatter and then we had Verizon. The US telecoms group followed Danone’s acquisition-related heavy lifting the day before with its own M&A-related funding deals.

Snai deal

Snai issued a dual tranche transaction

A 3-tranche offering of €3.25bn (plus £450m in a 19-year deal) saw the individual tranches priced 5-10bp inside the initial guidance. With the day’s total for IG issuance at €5bn from three borrowers – and €11.2bn from two-sessions, for the month we’re up at €23.6bn. Three more business days to go.

High yield supply came from Italian betting and gaming group Snai SpA which issued €570m in a dual tranche transaction, becoming the first HY offering this week and taking the month’s total to €3bn. That was added to by HomeVi due to price just under €330m also in a 2-tranche deal. Senior financials had just €250m from Deutsche Hypo, the rest of the day’s action being in the SSA space.

Draghi’s being reasonable, so why the sell-off?

The news flow in the day was mixed but generally a little more on the disappointing side (Apple’s outlook being a case in point).  However, much was being made of a speech Draghi had given the previous evening. In it, he made sensible and measured comments about the need for fiscal policy to loosen across the Eurozone, if only so that monetary policy can return to normal – eventually, but combined that they can engender an environment where the growth dynamic would become more assured. As ever, the politicians will not react – or be too slow to, and monetary policy will have to stay loose for a while.

That’s the reality, and we’re not kidding ourselves that it will be any different. Anyway, the debt markets chose to look at it as a hawkish speech (wrongly, in our view), and the sell-off in government bonds followed. We saw some big moves.

Everything closed off the worst levels, but it still wasn’t a great session. The 10-year Bund yield pushed a stunning 6bp higher to 0.08%, the equivalent maturity BTP was up at 1.46% (+8bp) while Spanish Bonos were up at 1.13% (+5bp). Long gone are the days when BTPs were yielding 1.02% & Bonos 0.86%, and given where current levels are it looks like we might not be seeing those lower ones again. The potential for higher rates/yields from that market misinterpretation also saw to it that stocks would come under some pressure. Gilts saw a decent sell-off too, the 10-year rising to 1.15% (+6.5bp).

The DAX fell and once again dipped into the red YTD, the FTSE was below 7,000 again and most bourses lost up to 0.5%. Oil was lower for most of the session, but snapped back after US inventories showed a surprise decline. Brent popped up above $50 per barrel having dropped below it earlier in the day – but still lower in the session.

Corporate bonds markets hold firm

Spreads moved a little tighter again, the IG Markit iBoxx index at B+121.4 (-0.6bp) but index yields rose by 5bp (to 0.99%) and returns took bit of a hit owing to the sell-off in the underlying. Still, spreads have closed tighter in every session this month. It was a similar picture in the sterling market with spreads just 0.2bp tighter for the index, but the index yield up at 2.92% (+8bp) as Gilts got a little hot under the collar.

Surprisingly, the HY market fared best with spreads 3bp tighter and the index moving to B+404bp, with the index yield barely changed at 3.68% and returns unaffected. The iTraxx indices were a touch higher with Main left at 71.5bp and X-Over at 321.5bp.

Have a good day. Back tomorrow.

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.