2nd September 2019

That’ll do nicely

MARKET CLOSE:
iTraxx Main

48.8bp, unchanged

iTraxx X-Over

250bp, -3bp

🇩🇪 10 Yr Bund

-0.69%, +1.5bp

iBoxx Corp IG

B+122.3bp, +1.5bp

iBoxx Corp HY

B+424.5bp, unchanged

🇺🇸 10 Yr US T-Bond

1.50%, unchanged

🇬🇧 FTSE 100

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

Fixed income performance continues to shine…

Equities have, at times, buckled under the strain of the US/China trade headlines. Corporate credit seems to be losing its head in a fog of negative yields just as primary debt offerings print with zero coupons. Price now matters more than yield. The rates market has become the investment for choice as investors front-run the central banks pushing prices higher, and yields have felt the strain of the demand. Who would have thought that we’re talking in terms of option-like returns for Eurozone government bond market investors so far this year?

Normally an unexciting market, lumbering and low or no returns (easily less than 1% typically in any given year) but Eurozone government bonds have rallied hard and put 10.5% or more of performance in the bag for investors for the year to date. They added 2.7% in August alone. Clearly, fixed income came out tops in August, with all markets returns higher while equities sagged in comparison – for a change.

August belonged to Fixed Income

The corporate bond market has followed close behind rates, with IG credit up 7.7% year to date, HY some 9.0% with the CoCo market ahead  at 11.2% (all iBoxx index). In the period to end July, the corresponding numbers were 7%, 8.3% and 11%, respectively. Although spreads were wider across the corporate bond market in August, the performance was driven by that massive rally in the underlying.

Within credit, non-financial returns are up at 8% year to date (7.4% to end July) and financials are up at 7.1% (6.4% in the Jan – Jul period).

The rising tide hasn’t lifted all boats, though. Equities have given little back in August. The Dax closed August up 13.1% for the year, versus 15.1% in the period to end July. The S&P was up 19% in the 7-months to end July, but the trade tariff-indiced wobbles saw the index fall from record highs to return 16.7% in the year to end August.

This might be how it continues for a while yet. After all, the US/China tariff regime has kicked in, we’re getting mixed macro data just about everywhere, but the skew is to the downside. The ECB meets next week and the market has already bet the house on a rate cut (20bp) and possibly as much as €30bn of new monthly QE as Draghi’s time at the top draws to an end.

From a historical perspective, credit is obviously rich but it is only going to get more expensive and less appetising. Investors have little choice but to add. Cash doesn’t work. The high yield market is set for a rally. That yield differential between it and IG is at 3% (iBoxx, it has been well under 2%). The HY-IG compression trade will be on, once the ECB announces its intentions.


US holiday doesn’t deter borrowers

Brexit might have been all over the headlines as the UK political scene is expected to dominate proceedings this week, and while the US was enjoying its long weekend (Labor Day on Monday), primary wasn’t being held back. Following in from the near €16bn of IG non-financial deals last week (26 tranches), we had another cluster of borrowers in the market to get the week started.

€500m deal for Santander Consumer Bank

The going is good. Santander Consumer Bank got the ball rolling for September’s deal flow with a €500m, 5-year maturity senior preferred deal priced at midswaps+68bp (-17bp versus IPT). Mizuho took €1bn in an equally split dual-tranche offering priced at midswaps+65bp and midswaps+67bp, respectively, on combined books at around €2.5bn.

After an August with just €1bn of HY deals, ThyssenKrupp and Smurfit Kappa did their best to try and arrest the decline in borrowing. ThyssenKrupp issued €1bn in a 3.5-year priced at midswaps+255bp. The deal managed a book of around €3bn and pricing was tightened by 35bp between the initial talk and the final level. They were followed by Smurfit Kappa which took an increased €750m in an 8-year offering priced to yield 1.5%, which was 50bp inside the opening mumble. Books were up at €3.9bn.

As for the non-financial IG market, the French borrower RTE issued €500m in an 8-year maturity at midswaps+50bp (-15bp versus IPT) and €700m in a 30-year at midswaps+105bp (-30bp versus IPT). Books of €3.3bn were clearly skewed to the longer-dated offering.

Other deals worth a mention included Water Power Distribution which issued £250m in a 12-year at G+143 (-12bp versus IPT, £1.1bn book) and Rabobank’s €1.25bn CoCo which came in the form of a PNC7.25 offering 3.25% – and notable for being the lowest ever coupon for an AT1 issue. The book was 3x subscribed.


Brexit – what else?

Events around Westminster were the day’s dominant news event with the UK’s political machine on a potential election war footing. This story will develop on Tuesday and Wednesday as the ‘no-deal’ Brexit vote nears.

Sterling took a tumble into the developing uncertainty, Gilts were better bid and the 10-year left to yield 0.42% (-6bp) while equities rose 1.1%.

With the US markets closed, it was a quieter session elsewhere, with most equities closing flattish for the month’s opening session. In rates, the 10-year Bund yield edged higher to -0.69% (+1.5bp)

In synthetic credit, the index was unchanged for iTraxx Main at 48.8bp, but edged 3bp lower in X-Over to 250bp.

In the cash market, the iBoxx index closed 1.5bp wider but most of that was month-end index driven while the HY index was effectively unchanged at B+424.5bp. There was little going on, anywhere, in secondary.

Have a good day.

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.