29th September 2016

The storm has passed

FTSE 100
6,849, +42
10,438, +77
S&P 500
2,171, +11
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
334bp, -4bp
10 Yr Bund
-0.15%, -0.5bp
iBoxx Corp IG
B+126.7bp, unchanged 
iBoxx Corp HY Index
B+448bp, unchanged
10 Yr US T-Bond
1.57%, +1bp

The rain has fallen and the sun is shining…

After the storm, likened to a hurricane as far as Deutsche Bank is concerned, comes the calm.

Equities recovered some of their losses, secondary credit stabilised while government bonds initially firmed up; better bid by a still shell-shocked, wary and perhaps suspicious investor base. It didn’t last and while the 10-year Bund yield dropped to -0.15%, Spanish 10-year yields saw new record lows in the session (-0.89%). Gilt yields dropped some more – and managed to mostly hold the gains into a generally better tone for risk assets.

The lower yield levels owing to the rally in the underlying over the past few sessions are all helping total return investors feel good about the performance they will have managed this month/quarter/year to date.

It also seemed like the pulling of several deals this week amid that banking sector-induced volatility had scared a few syndicates off, now probably advising issuers to hold off until we have seen out the quarter. Well, that notion soon faded as the sluice gates kind of opened. Out they gushed.


Veolia Environnement: First out of the gates

Veolia Environnement and Hutchison were out first, followed by a euro-denominated hybrid from EnBW (they already issued a $300m hybrid this week), and we have a dual tranche acquisition financing offering from Lanxess in the works.

The former came with a dual tranche combined €1.1bn deal in 7 and 12-year maturities at levels which has us rolling our eyes (that is, very little spread/yield), while Hutchison came with a little more juice (and a hefty €1bn) – but probably had to owing to the premium it needed to pay for being Asian based. EnBW gave the yield hogs much more but needed to owing to the subordinated nature of that transaction (60NC5.5 for €725m, yielding 3.5%). High yield didn’t miss out with a €125m tap from Sarens Finance of its 2022s.


BASF: Back with a £250m, 7 year deal

BASF was back, in sterling with a 7 year deal for £250m while Cabot Financial (£350m) and Jerrold Finco (£375m) were looking at the sterling HY market (likely today). There is now little doubt that the announcement of sterling corporate bond QE by the Bank of England has stirred issuance from the corporate sector, and while the level of issuance is running at close to the best levels ever, we remain sceptical as to how long it will last.

With those deals, we’ve now had a slightly more respectable €3.6bn issued this week, €25.2bn this month in euro-denominated IG non-financial corporate debt. After almost €20bn was printed in the opening two-weeks of the month – and talk of a rammed pipeline on the follow, the subsequent issuance of around €5bn since then has both wrong-footed the market expectations and disappointed. We won’t get even €30bn for the month when we could have been looking at (and reasonably expecting) €40bn to have been printed.

Little by way of excitement elsewhere

Generally, stocks closed out 0.75% or so higher, failing to push on during the day. The market felt a little tired. Government bonds, as stated above, managed to hold on to any gains and yields closed at the session’s best levels.

That means 0.15% for the 10-year Bund, and within touching distance of our -0.20% target. Spanish Bonos managed to close at their record-equalling low yields of 0.89% while Italian yields also moved down to 1.18% (-2.5bp). Gilts closed unchanged to yield 0.68% in 10-years. Maybe oil-wallahs were happy with Brent up at almost $49 per barrel (+6%) on hopes of.. something (another headline?)!

Secondary cash credit, in IG, closed unchanged. Yields dropped a basis point (index, 0.84%) while returns edged higher leaving IG credit to likely return a superlative 6%+ as we close out the quarter.

The HY market closed out the same way, unchanged with the Markit iBoxx index left at B+448bp when the marks went in. The synthetic indices closed better offered (lower) with iTraxx Main at 73bp (-1bp) and 334bp (-4bp) – to be expected on the back of the moderate rally in risk assets.

Not much more to add. Good luck, 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.