- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 ,||DAX ,||S&P 500 ,|
Playing the game…
There was a cautious tone to the markets again and after several sessions with that being the case, we must be thinking in terms of a reluctance by investors to chase the markets deeper into record territory so close to year-end. That certainly seems to be the case for European equities, while rate markets are stuck in a fairly tight range of late, cognisant of the potential for event risk given that Trump is on his travels and the Saudi domestic/Iran situation still needs to play out.
Credit is focused on the new issue market – which is delivering enough for investors to be happy with, while spreads are no longer ratcheting (or rather grinding) relentlessly tighter. Of course, when high yield markets are no longer ‘high yielding’ (in historical terms anyway) we’re obviously extremely cautious about the need to chase the market.
We would think few are, but when equities do go higher as they have been of late, the correlation between them and high yield make for the Street to tighten up the market directly or through being less accommodative from a liquidity perspective. It’s all the more amazing that we have had a massive record year for issuance and spreads have been at record levels as well. That negative correlation has broken down because demand is just too great. We’re going to blame that on the distortive effect of the ECB’s QE, but the upside is that we have garnered close on 7% returns on almost 150bp of spread tightening.
So for credit, the focus on primary means that borrowers are still predominately price givers, drawing investors in still with those attractive levels in the opening price guidance (versus secondary), and then almost automatically tightening up into final pricing by 15-20bp on average. The bigger deals (for example, BASF) are still cheap to the curve at final pricing – which they need to be because of the sizes of the tranches, but they could be cheaper.
One could argue that secondary market levels are really no longer valid indicators (although we don’t really have an alternative) in which to price deals off, because of the massive distortion of it by the ECB. For example, Daimler’s 10-year deal this week achieved a price of midswaps+25bp which, for 10-year money, is great business for the borrower (even if fair value of the secondary curve was high single digits).
This dynamic seems well-entrenched now and the odd borrower that went out with firm pricing at the start whatever the level of demand (Vodafone back in the summer, for example), will now be seen to have been an isolated event. Admittedly, there is a level of price discovery especially for lower rated, less fancied borrowers, but 15-20bp of tightening for blue chip borrowers on every deal? Hmm.
To be fair, investors are not helping themselves either since they give feedback wider than where they would actually pay! Honesty might help the market, but the market is functioning pretty well with both sides playing the game, so to say.
Primary volumes drop
The primary markets threw up fewer deals, but there were enough of them to keep the engine ticking over. A couple of high yield borrowers added to the unrated Ferrari’s return, with sub-benchmark sized offerings from National Express and Coca-Cola European Partners.
Ferrari took €700m in a long 3-year maturity priced finally 20bp inside the opening gambit, at midswaps+45bp. Next up was Coca-Cola EP for €350m in a 4-year floater at Euribor+18bp. Finally, National Express also went for floating funds, with a €250m, May 2020 maturity priced deal at Euribor+40bp. So just €1.3bn for the day after Wednesday’s near €6bn of deals.
In the high yield primary market, we had Titan Global issue €250m in a 5-year maturity at 2.375% which was followed by a combined €475m from Haya Finance. The high yield supply of €725m in the session took the monthly total to €2.7bn and the 2017 level thus far to €64.5bn, s smashes the previous full-year record by €7bn – with probably 5 weeks of business still to go!
Pemex (£450m) and Western Power Distribution (£250m) took sterling funding while Nestle was back, this time in dollars for $800m. There was nothing in financials.
There was weakness everywhere. Even in safe-havens. We are not sure why because there was no obvious trigger. Maybe just a bit of nervousness around where valuations (for risk assets) and yields (for duration product) had got to. Perhaps a healthy reassessment? Yields rose across the board. The 10-year Bund yield was up at 0.37% (+5bp), Gilts in the same maturity were yielding 1.27% (+4bp), Bono yields rose by 5bp to 1.53% while BTPs were up at 1.81% (+7bp). 10-year Treasury yields were a touch higher, the 10-year at 2.33% (+1bp).
As for equities, the FTSE lost 0.6%, the Dax took a 1.5% tumble and most European bourses dropped by up to 1%. The US indices were down as well, by 0.6% or more depending in the index.
In the credit market, clearly we were weaker as well. The synthetic indices saw Main up at 52.5bp (+0.9bp) with X-Over underperforming some 9.2bp higher at 242.5bp.
For cash, we saw just moderate weakness in IG, which makes sense given the overriding demand for corporate bonds. The Markit iBoxx IG index was left just 0.6bp wider at B+96.9bp. Even the higher yielding, closely correlated to equity/risk sentiment CoCo market saw only moderate weakness, the iBoxx CoCo index at B+379bp (+2bp), with the big move here coming in Wednesday’s session.
Finally, the high yield market drifted a little wider too, with the index up at B+266bp (+5bp).
Have a good day.
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